Showing papers on "Exchange rate published in 1974"

The Exchange Rate and U. S. Agriculture

Abstract: Previous analyses of trade and development problems of U. S. agriculture have neglected the role of exchange rate policy. An attempt is made to understand the role of the exchange rate on these problems in a non-parametric fashion by means of a model of induced technical change. It is argued that the overvaluation of the dollar and the policy measures to combat it aggravated the adjustment problems of U. S. agriculture, especially during the 1950's, and resulted in shifting an important share of the benefits of technical change to the consumer. Moreover the recent devaluation of the dollar constitutes an important structural change for U. S. agriculture.

Estimating the shadow price of foreign exchange in project appraisal

Abstract: The estimation of the shadow price of foreign exchange under the assumptions of optimal policies and continuing protection for project evaluation in developing countries is discussed. For any given policy alternative, the information requirements of alternative methods of project appraisal are identical. If the appropriate shadow exchange rate is used, alternative methods of project appraisal will give the same conclusion for accepting or rejecting a project. Under the assumption of optimal policies, there will be a need for using a shadow exchange rate to convert domestic values into world market prices. The use of this rate offers advantages over expressing the social opportunity cost of primary factors directly in world market prices. The shadow exchange rate has the advantage that it focuses on the balance of payments constraint of developing countries, and external factors such as world demand conditions, foreign aid, private investment, and debt servicing can easily be taken into account. Policy assumptions have implications for the prices of primary factors, the valuation of products that are not fully traded, and the origin of traded inputs.

An analysis of imported inflation in a short-run macroeconomic model

Abstract: An analysis of imported inflation in a short-run macroeconomic model. We identify four channels through which foreign inflation impinges on the domestic economy and show how each of these creates subsequent repercussions through- out the system. Under fixed exchange rates some of the feedbacks operate in offsetting ways, making most of the total responses indeterminate. These ambi- guities tend to disappear in the limiting case of perfect capital mobility. In discussing the policy implications of the model, we focus on the three policy objectives, domestic output, domestic inflation, and the balance of payments. Particular emphasis is placed upon the use of exchange rates as a strategic variable for achieving domestic stability. We show that while monetary and fiscal policies should in general be directed at all three objectives, exchange rate policy should be directed at only the internal policy goals. The paper concludes with a brief discussion of the flexible exchange rate case. Une analyse de l'inflation importee dans un modele macroeconomique a court terme. Les auteurs identifient quatre canaux par lesquels l'inflation a l'etranger a une influence sur l'economie domestique. Ils montrent comment chacun com- porte des effets dans l'ensemble du systeme. En situation de taux de change fixe, certaines des effets se manifestent de fagon compensatoire, ce qui donne un effet global indetermine. Ces ambiguit6s ont tendance "a disparaitre dans le cas limite

A Framework for Financial Decisions in Multinational Corporations–Summary of Recent Research

Abstract: The purpose behind this review of recent research on financial decisions in the multinational corporation (MNC) has been, first, to further the discussion as to the appropriate normative framework applicable to financial decisions in the MNC, and second, to suggest directions for further research by pointing to open questions.The analysis focuses on the major financial decision areas of the firm as well as on important new factors introduced by the international environment. Specific issues disussed are: capital-market segmentation, financing decision, financial structure and cost of capital, investment decision and exchange risk.The principal conclusion presented as a basis for discussion is that the financial decision framework developed for the one-country firm can essentially be extended to the case of the MNC. This should hold true even if partial restrictions to capital flows exist. The only limiting requirement is that all subsidiaries be wholly owned, i.e., equity securities be issued by the parent firm only. A specific case in which the analogy to, the one-country firm breaks down arises when joint ventures are introduced.A number of areas for further research are identified. Most prominent, perhaps, are (1) an operational concept of economic exchange risk exposure, i.e., measuring the impact of exchange rate changes on the value of foreign operations; (2) criteria for evaluating foreign investment projects consistent with the firm's cost of capital; and (3) empirical evidence on the extent to which MNCs are affected by capital-market segmentation.

Monetary Policy in Developing Countries

Abstract: Publisher Summary This chapter discusses monetary policy in developing countries. From the long-run point of view, the problem of desirable monetary policy reduces primarily to the desirable rate and form of inflation. Two intermediate steps lead to this identification: the recognition that monetary policy is concerned primarily with the quantity of money, not with the terms and availability of credit, and that inflation is always and everywhere a result of a rapid rate of increase in the quantity of money. The chapter discusses these two intermediate steps before turning to the relation between inflation and development. The best way to foster an effective and diversified financial structure is to let financial institutions develop in response to market forces. Repressing prices of goods and of labor, while no less frequently attempted than repression of exchange rate and interest rates, generally does less economic harm. The reason is that they tend to be easier to evade. However, they do great social harm. Given price controls, black markets serve a socially useful purpose by preventing the distortions that would otherwise develop. The effect of price controls is, therefore, to make socially and individually beneficial action that is morally repugnant because it involves breaking the law. The conflict tends to undermine the moral capital of a nation. Good monetary policy cannot produce development. Economic development fundamentally depends on much more basic forces: the amount of capital, the methods of economic organization, the skills of people, the available knowledge, the willingness to work and to save, and the receptivity of the members of the community to change.

Exchange Rate Flexibility and Macro-Economic Stability

Abstract: W OULD a movement from fixed to flexible exchange rates increase or decrease the stability of economic activity? This paper presents calculations of how increased responsiveness of exchange rates to balance-of-payments pressures would have affected macro-economic stability for most of the world's developed nations in the recent past. It also tries to assess how openness affects the optimum responsiveness of the exchange rate to these pressures from the standpoint of macro-economic stability, an important issue in the debate over what constitutes an optimum currency area.' Our point of departure is the model which J. L. Stein (1963) built over a decade ago in order to relate macro-economic stability to the exchange-rate system. He argued that a balanceof-payments deficit under fixed exchange rates would cause currency depreciation if the exchange rate were flexible and depreciation stimulates output. Also, noting that the reverse is true for a surplus under fixed rates, he observed that in order to foster the stability of real absorption in a Keynesian economy,2 one would want the domestic currency to depreciate (appreciate) during periods when the level of output is below (above) normal. Thus, he concluded, Keynesian economies should opt for flexible or fixed exchange rates according to whether or not fluctuations in output under fixed rates (Y) and fluctuations in the excess supply of foreign exchange under fixed rates (i.e., the balance of payments surplus) (s) tend to have the same sign. In other words, Stein's rule prescribes a flexible rate for any Keynesian economy in which cov (Y, s) > 0. However, as this paper shows, if maximization of the stability of output is the goal, a better rule prescribes a flexible rate for only those economies in which the variance of what output would be under flexible rates is less than what the variance of output would have been under fixed rates. This latter rule is superior to Stein's version because there may be only a weak correlation between what output would have been under fixed rates and the state of the foreignexchange market; when the correlation is weak, the effect of induced changes in the exchange rate will be just like that of any other random disturbance: namely, to increase the variance of output. Thus, even if the covariance is positive, if the correlation is less than one, adoption of a flexible exchange rate may still increase the variance of output.3' 4

Coffee prices and the brazilian exchange rate

Abstract: IT is well known that changes in world prices of primary commodities are important determinants of changes in exchange rates of producing countries. While reduced demand for any country's exports might be expected to lead to a less favourable balance of payments position, two factors often combine to intensify the link between world product prices and rates of exchange for primary producers: 1. Inelastic demand for the product, creating a link between world prices and revenue in foreign currency from exports. 2. Export concentration. Many primary producers are highly specialized, receiving the bulk of their foreign exchange from just one or two staple exports. This situation is, of course, especially common among the underdeveloped primary producers.' The purpose of this paper is to attempt to gauge the quantitative importance of the above effect for one case: the influence of the world price of coffee on the exchange rate of the largest producer, Brazil.2 There are three reasons why such measurements may be of interest: 1. An exchange rate which responds in a systematic manner to coffee prices becomes part of the system which determines, among other things, the price of coffee itself. It is necessary when examining price formation in world coffee markets to take into account such rate responses since the rate forms a link between producers and consumers.3 2. Exchange rate movements are one of the routes whereby fluctuations originating in one sector of an economy are spread throughout the economy. This has been a frequent theme in discussions of mono-export

The exchange rate and the balance of payments

Abstract: 1 The Foreign Exchange Market 1) The term "foreign currency" refers to foreign I. coins II. notes III. bank deposits A) II only. B) II and III only. C) I and II only. 2) If portable disk players made in China are imported into the United States, the Chinese manufacturer is paid with A) dollars. B) yuan, the Chinese currency. C) international monetary credits. D) euros, or any other third currency. A) dollars. B) yen, the Japanese currency. C) international monetary credits. D) euros, or any other third currency.

Accounting for Price-Level and Exchange-Rate Changes for U.S. International Firms: An Empirical Study

Abstract: Price-level and exchange-rate changes compound the problems of evaluating the performance of the foreign subsidiaries of a U.S. company. If the parent firm is to evaluate subsidiary performance properly, it must recognize and account for these changes in corporate evaluation and control procedures. This can be accomplished best through a variance analysis in the budgeting process.

The Contribution of Pakistan's Large Scale Manufacturing Industries Towards Gross National Product at World Prices

Abstract: Over the period 1949/50 to 1970/71, Pakistan's large-scale manufacturing sector grew at a compound rate of more than 15 per cent Its share of GNP increased during this period from 15 per cent to 94 per cent Various factors contributed to this growth, not the least of which were the various incentives provided to the manufacturing sector via tariffs, restrictive import licensing, tax holidays and an overvalued official exchange rate Recently, several studies, and most notably an OECD study by Little, Scitovsky and Scott [10] (hereafter referred to as LSS) questioned the meaning of the growth rates and sectoral shares of manufacturing sector when the goods produced in these sectors are valued at prices distorted by various subsidy and trade restricting policies They concluded that a better measure of the manu¬facturing sector's contribution could be obtained by valuing a country's gross national product not at domestic prices but at world prices—ie the prices that would obtain in the country were there no trade tax or quotas

The future of the international monetary system

Abstract: So much has been written and is currently being written on the future of the international monetary system, that it is impossible to read everything and to say anything new. Moreover things are changing all the time, often very fast and unexpectedly, so that what one says today may appear to be out of date tomorrow. In such a situation it is, I believe, a good idea to go back to fundamental principles which are often lost sight of, although they often are a safer guide for things to come than the extrapolation of recent trends. Let me start from a proposition on which in my opinion most economists, advocates of floating as well as of fixed or "stable but adjustable" exchange rates could agree: The ideal international monetary arrangement would be permanently fixed exchange rates with fully convertible currencies (no controls) and preferably no margin, provided the system does not impose too much inflation or deflation (unemployment) on any country. This is the arrangement which we have inside each country including the largest. Nobody, not even the most radical floater, has recommended that the United States should be split up into different currency areas. I need not take time to explain the immense advantage which the U. S. economy derives from having a unified currency, because that has been done many times by advocates of fixed exchange rates, such as Charles Kindleberger and Robert M und ell as well as by some floaters such as Allan Meitzer. Naturally the smaller a country the more important a stable exchange rate and very small countries, Liechtenstein, Monaco but even Luxemburg have virtually no choice but to link up rigidly with the currency of a large neighbor.

Balance of Payments and Exchange Rate Systems

Abstract: (1974). Balance of Payments and Exchange Rate Systems. Financial Analysts Journal: Vol. 30, No. 4, pp. 26-32, 76-82.

Capital Mobility and the Stability of the Flexible Exchange Rate System

Abstract: I. Customary dynamic analysis, 489. — II. Alternative dynamic system, 492.— III. Concluding remarks, 493.

Preis- und Wechselkursindizes für den Export österreichischer Halb- und Fertigwaren

Abstract: The purpose of this article is to describe the computation of various export price and effective exchange rate indices for the Austrian exports of manufactured goods, considering especially the competition of other exporting countries on the relevant markets (including domestic production alternatively) and to present the development of these indices during the decade 1963 to 1973. In analogy to well-known concept of double-weighted competing export price indices of a country a double weighted exchange rate index was constructed. Weighting schemes were derived from trade-share matrices of the eleven most important producers and suppliers (respective buyers) of manufactured goods. Relative export price indices on local currency basis and relative effective exchange rate indices were computed separately and then put together in order to get relative export price indices adjusted for effective exchange rate changes. These indices indicate that the competitive position of the Austrian exports of manufactured goods improved in the period 1963 to 1973 by more than 10%.

Speculation, Hedging and Arbitrage

Abstract: Perhaps the most difficult problem that economists and policy makers face is understanding how the existence of uncertainty affects people’s behaviour and in particular their reaction to various economic policies. In the simple model developed in earlier chapters, we emphasised that the informational requirements for the achievement of equilibrium are quite large. When we realise that people base their decisions not only on current prices and incomes but also on expectations about the future values of these variables, the magnitude of the problem becomes apparent. As a result buyers and sellers gather whatever information is readily available and form expectations about prices, etc. on the basis of this. This means that although they may often be correct, their actions may sometimes lead markets away from their equilibrium positions. The purpose of this chapter is to explain some of the transactions that arise in the foreign exchange market because of uncertainty and to show how the demand and supply of foreign exchange may be affected by changes in expectations, particularly about exchange rates. In Chapters 10 and 11 this theme will be returned to when we examine the implications of alternative exchange rate mechanisms. One conclusion will become quite clear: it is extremely difficult to reach any decision about the most desirable international monetary system without more information about the activities discussed in this chapter.