Showing papers on "Exchange rate published in 1975"

Exchange rate changes, inflation, and the value of the multinational corporation

Abstract: THE EFFECTS of differing national rates of inflation and exchange rate changes on the profitability and hence the risk of multinational corporations is currently receiving much attention from both the management of these firms and the accounting profession. In addition, the relationships between changes in currency values, both internal and external, and the international investing, trading, production, and marketing decisions of multinational firms are clearly of great interest to the national governments involved. This paper, with the aid of a two-country model, first focuses on the profitability issue. It then characterizes and analyzes an oligopolistic firm's binational profit-maximizing strategy under inflation and devaluation. The latter work draws heavily on Horst's [14] detailed examination of the effects of differing national tax and tariff rates on the profit-maximizing strategy of a firm selling to two national markets simultaneously. The unit of analysis here is the overseas subsidiary of an oligopolistic multinational corporation' which sells its (the subsidiary's) output both locally (country 1) and abroad (country 2). Country 1 is subject to both inflation and devaluation while country 2's price level and exchange rate are assumed to remain constant throughout this paper. Initially, production will be limited to country 1. The effects of relaxing this restriction to permit production in both countries will be analyzed later on. The results arrived at for a devaluation would be reversed for a revaluation. Accounting practice and economic theory are shown to diverge widely in their implications regarding the effects of these exchange rate changes. Most accountants and firms take a "balance sheet" approach in defining their exposure to exchange rate changes. This approach assumes that only financial items on the current balance sheet whose dollar (or some other base currency) value will be adversely affected by a devaluation are

The Random Behavior of Flexible Exchange Rates: Implications for Forecasting

Abstract: This article explores the forecasting accuracy of the “random walk” and other models of exchange rate behavior Under present conditions of floating exchange rates, it is argued, anticipations of future demand and supply determine fluctuations in exchange rates The authors present results consistent with the notion that, for the world's major currencies, the foreign exchange market is an “efficient market” and exchange rate forecasting is not profitable

Purchasing power parity and black-market exchange rates

Abstract: This paper develops a theory of black-market exchange rate determination as a function of the market-clearing rate, the official rate and changes in official reserve levels. The model is tested for three countries over the period 1952–1971 by using purchasing-power-parity calculations as approximations of the equilibrium rate. The results indicate that relative rates of inflation are the dominant forces influencing equilibrium exchange rates.

Evaluating Financing Costs for Multinational Subsidiaries

Abstract: This paper presents a methodology for determining the true costs of alternative sources of financing for the multinational corporation when the risk of exchange rate changes is present and different tax rates and regulations are in effect. The cost formulas presented can then be used to calculate the cheapest financing source given the expected exchange rate changes.

Commodity Markets and Bond Markets in a Small, Fixed-Exchange-Rate Economy

Abstract: Commodity markets and bond markets in a small, fixed-exchange-rate economy. This paper opens up Metzler's macro-model for the small-country, fixedexchange-rate case by explicitly disaggregating between traded and non-traded goods and between domestic bonds and foreign bonds. The distinction between stocks and flows carries over to that between the stock capital account (the level of reserves) and the flow capital and trade accounts (the balance of payments). Fiscal policy in non-traded goods causes an increase in reserves and has an ambiguous influence on the trade account. Monetary policy in domestic bonds worsens the trade account and has an ambiguous effect on the level of reserves.

Monetary independence under floating exchange rates

Abstract: THE PERIOD SINCE February 1973 provides the first opportunity since the 1920's to evaluate substantial experiences with floating exchange rate system With the exception of Canada in the 1950's, the prior experience with floating rates has been limited to the brief interludes, largely interim floating toward new parities Since the period is transitional from a pegged system to a floating system, the evidence may not be typical for a longer period The movements in the exchange rates of several countries within the last twenty months have been sharp Several currencies have appreciated by as much as 20 or 30 per cent within a few weeks; several have depreciated by as much as 10 and 15 per cent within a week Onesource of stress had been the October 1973 oil embargo and its anticipated impacts on trade balances of various countries However, much of the sharp movement in the exchange rates occurred before the embargo The contrast in the behavior of the spot rates for five major currencies relative to the dollar is evident in Table 1, both in terms of the percentage changes in the closing spot rate from one week to the next, and the spreads in percentage terms, between the maximum high and the minimum low rates for each week The frequency of large changes is substantially higher in the mark and the Swiss franc than in the yen and the Canadian dollar The appreciation of the mark until July, 1973 and its subsequent depreciation reflected variations in German monetary policy Because the major advantage attributed to a floating rate system is the increased scope for national monetary independence, the impact of changes in monetary policy on the exchange rate and on prices and employment is a critical issue in the appraisal of the advantages attributed to a floating rate system1 Central bank intervention under the floating rate system complicates the evaluation of the system's alleged advantages Numerous European countries participated in the joint float The variations in the foreign exchange value of the mark appeared to induce similar variations in other European currencies, so that a de facto mark currency area developed The movements in the Swiss franc, which was not in the snake-in-thetunnel arrangement, parallel those of the mark

The Exchange Rate and U.S. Agriculture: Comment

Abstract: In a recent article Schuh states "that a very important variable has been left out in the conception of this [farm] problem and that at least since the early or mid-1950's the definition of the problem has been at least partially wrong because of this omission The omitted variable is the exchange rate and its role in trade, in the valuation of resources within the U S economy, in the distribution of benefits of economic progress between consumers and producers within an economy, and in the way the benefits of technical change are shared between the domestic population and the world at large" (pp 1-2) The suggestion that an overvalued dollar has been a "missing link" in a viable explanation of events taking place in agriculture in the past twenty years is sufficiently novel and far-reaching that it deserves greater analytical discussion than offered in Schuh's article

Fiscal policy and the government budget constraint under alternative exchange-rate systems 1

Abstract: UNTIL recently, the discussion of fiscal policy has been rather imprecise, since our aggregate-demand models were not manipulated subject to the constraint that the sources and uses of government funds be balanced. In 1968, Carl Christ showed that when proper account is taken of the financing restraint on the government, the conventional multiplier results are incorrect. For instance, Christ finds that the long-run government spending multiplier on national income depends only on the marginal tax rate. This special result holds on the assumption that the transitory deficit is financed by money creation, and that the economy is closed to any foreign trade in either goods or bonds. The purpose of this paper is to extend Christ's analysis. Since the purchase of foreign exchange requires government financing, we add a more detailed government budget constraint to several variants of an open-economy model. Explicit account is taken of the stock and the flow aspects of both the domestic-held and foreign-held bonds. The effects of bond-financed and money-financed expenditures are then examined for both fixed and flexible exchange-rate systems. Bond-financed fiscal policy has been considered for a closed economy by Christ (1967, 1969), in a simulation context, and by Silber (1970) and Hansen (1973), in a theoretical context. There are drawbacks to these papers, however. In the Silber and Christ papers, the budget constraints have been specified incompletely: the interest on the public debt is omitted both from the public's disposable income and from the government financing restraint.2 In Christ's 1969 paper only the first of these omissions remains, but the one omission suffices to make the general public's and government's budget constraints inconsistent with each other. There are no inconsistencies in Hansen's study; the only drawbacks are questions of realism. His analysis is limited to the first-period or impact multipliers for a closed economy in which interest on the debt is not taxable. In the open-

The Exchange Rate and U.S. Agriculture: Reply

Abstract: In her comment, Vellianitis-Fidas makes three points: (a) that I offered little evidence in support of the central thesis of my paper and that what she construes as my main evidence constitutes a strained interpretation of exchange rate and balance of payments theory; (b) that the persistent deficit in the U.S. balance of payments was because the dollar was a major reserve currency and does not indicate that the dollar was overvalued; and (c) that even if the dollar was overvalued it would not have mattered since in her view the exchange rate has no effect. In reply, I focus on these three main issues rather than comment in a detailed way on particular statements. Her paper has numerous inaccuracies, such as "The years since 1940 represent a period of unusual growth in U.S. gold stocks." To deal with all of them would require too much space and probably contribute little to the central thrust of the debate.

The Exchange Rate and U.S. Agriculture: Comment

Abstract: G. Edward Schuh has recently called attention to the relationship between currency exchange rates and agricultural prices. He emphasized that overvaluation of the dollar had depressed agricultural prices in the United States prior to 1971. However, the evidence presented by Schuh to show that the dollar was overvalued is unconvincing, and part of the price-depressing effects of overvaluation were probably shifted from American producers to foreign

Monetary Policy in an Inside-Money, Open Economy

Abstract: Tobin's banking system model, 83 — Opening the Tobin model, 86 — Foreign sector, 86 — Stationary-state, portfolio balance, 87 — Banking sector, 89 — High-powered money, 89 — Aggregate demand and supply, 90 — Government sector, 91 — Monetary policy, 93 — Fixed exchange rate: increase in required reserve ratio, 94 — Floating exchange rate, 97 — Conclusions, 99 — Appendix I: notation, 100 — Appendix II, 100

The selection of international borrowing sources

Abstract: In the evaluation of investment opportunities risk is often a primary con? sideration, Risk is usually not a factor of such importance, however, in the evaluation of borrowing opportunities. But when the borrowing opportunities in? clude the borrowing of foreign currencies, then the possibility of exchange rate fluctuations during the loan period may introduce a significant component of risk. It is our purpose to develop a method for evaluating and selecting inter? national borrowing sources in the face of exchange rate uncertainties. Previous quantitative work on the problem of selecting international bor? rowing sources has been almost entirely deterministic. Textbooks such as those of Robinson [11] and Zenoff and Zwick [14] discuss the choice between borrowing from the local country and borrowing from a foreign source given that the devaluation of local currency relative to that of the foreign currency during the loan period is known. In a previous paper de Faro and Jucker [1] also discuss this problem in the context of certainty and show that some of the earlier explanations were incorrect. Rutenberg [12] and Ness [8] have developed linear programming models of multinational corporations that allow for international borrowing (via inter-subsidiary transfers of funds) under certain exchange rate fluctuations. Exchange rate uncertainties have been considered primarily in the context of currency speculation and the purchase of forward exchange by Feldstein [2], Leland [5], and Folks [3]. These authors have all used the maximization of expected utility as the criterion for determining optimal forward ex? change positions. Lietaer [6] has also used the maximization of expected utility as the criterion in his programming model for generating an efficient set of policies for hedging against devaluation(s). The models of Feldstein, Leland, and Lietaer are all based on the portfolio selection model of Markowitz, and like the Markowitz model they all require the specification of a potentially large number of covariances. The model developed here is also based on the Mar? kowitz model. In an attempt to make the model operational, a substantial part

On the Evaluation of the 360-Yen Exchange Rate

Abstract: When one looks back on the postwar economy of Japan, it can be said that I, in my own way, adopted a hypothesis regarding the role of the fixed exchange rate that lasted for over two decades, beginning in April 1949. Because that exchange rate remained constant for so long, there was no opportunity for my hypothesis to be tested. I, who had continued to observe the Japanese economy on the basis of an untested hypothesis, which amounted to no more than a kind of vision, was suddenly able to encounter here an unexpected and magnificent "experiment of the century." The large revaluation of the yen following the Nixon Shock presented a golden opportunity for verification of my hypothesis of the undervalued yen. In presenting my Presidential Address, I hesitate to speak on a lowbrow economic topic like this, especially when I recall the impressive lectures given by previous presidents of this Association. For me, however, it is precisely this kind of vision that I wish to put before the members of this Associa...

Inflation and the International Monetary Situation

Abstract: Today, I thought it might be appropriate for me to say a few words about the nature and causes of the accelerating inflation from which the world has recently been sufferinig, and in particular about any interrelationships that may exist between inflation and recent developments in the exchange rate system. A certain degree of price inflationi has been pervasive throughout the postwar period. Durinig the 1950's its importance seemed on the whole to be declining, but later the trenid was reversed. During the decade of the 1960's, national income deflators in the industrial countries rose, on the average, at an annual rate of 3.4 percent. While the rate of increase fluctuated somewhat, therc was a gradual tendency for inflationi to gather speed towards the end of the decade. For a year or two this tendency was checked by the recession of 1970 and 1971, but in the following years the acceleration was rapid indeed with price increases of over 7 percent in 1972 and almost 12 percent in 1973 and 1974. Developing countries have always, on the average, had higher rates of inflation than industrial countries, but the same trend is visible among them: their consumer price indices, which had risen at an average rate of 13 percent during the 196572 period, accelerated to 24 percent in 1973 and 35 percent in the early months of this year. During the 1950's anid 1960's those who

Exchange-Rate Movements and Economic Development in the Late Nineteenth Century: A Critique

Abstract: In a recent article in this Journal, Jeffrey Nugent (1973) argues that the 50 percent decline in the price of silver in terms of gold between the mid1870s and mid-1890s was an important stimulus to the export expansion of silver-standard countries and a depressant on the export expansion of gold-standard countries during that period. Nugent's main evidence consists of several remarkable tables showing that the rate of growth of exports was, on the average, substantially greater for silver-standard countries than for gold-standard countries. The purpose of this note is to argue that these tables are not sufficient to warrant the inference that the depreciation of silver was a significant influence on the export performance of most countries in the late nineteenth century. 1. It is disappointing not to find in Nugent's article a comparison of trends in general price levels in the goldand silver-standard countries. For what we have here is a global application of the purchasing-powerparity theory of exchange rates. This theory says that if nonproportionate changes in price levels in different countries take place, then, assuming other things constant and a starting point at equilibrium, flexible exchange rates will adjust to leave the real terms of trade between the countries in question unchanged. Because of the failure of gold production to keep pace with real economic growth, price levels declined sharply in many countries on gold between the 1870s and 1890s. In the United States and Great Britain, for example, prices fell about 40 percent, which in absolute terms is only 10 percentage points less than the cumulative appreciation of gold-based currencies in terms of silver-based currencies. This small discrepancy might well be explained by inflation in the silver-standard countries.1 In any case, movements in relative prices between goldand

A model of exchange rate determination in a dual exchange rate mechanism

Abstract: In this paper a theoretical model of exchange rate determination in the dual exchange rate mechanism is established. The role of interest arbitrageurs, speculators and hedgers in the official and the financial markets (both spot and forward) is analysed. For each of the categories of participants excess demand functions for foreign exchange are derived, which lead to the equilibrium condition for the various market segments. Also the main links between the different markets are discussed.

The Behavior of Professional Risk-Bearers: Test of a Theory: Comment

Abstract: The nebulous nature of exchange rate expectations and speculation has posed a severe handicap to empirical studies of foreign exchange markets. The desire to circumvent this problem has led to numerous attempts by economists to specify an objective indicator of such speculative behavior. Perhaps the most formalized of these guides was derived by Jerome Stein.l This objective indicator of the speculative behavior of professional risk-bearers has been tested by Fred Glahe [2] . However, the benchmark utilized by Glahe in his test of Stein's theory is inappropriate. The purpose of this note is to illuminate this defect and provide an alternative test of Stein's theory. In contrast to the abstract analysis of most writers on forward-exchange theory, Stein provided a highly institutionalized approach to the forward market in his monograph "The Nature and Efficiency of the Foreign Exchange Market." Rather than develop a model of the idealized market participants, Stein's analysis was based on various features of the existing institutional framework of the forward market. His exposition described the role of large banks as professional risk-bearers (i.e., speculators), the speculative role of commercial traders through leads and lags in their spot market transactions, covered interest arbitrage, and covered foreign borrowing. An important implication of this institutional setting is that only the large banks can speculate in the forward market while all other speculators are restricted by bank practices to the spot market. Combining this institutional framework with the observation that "there is one pattern of price behavior that results from random variations in the balance of payments; and a different pattern of price behavior that results when the market thinks that changes in the exchange rates will occur in the near future" [4, p. 5] provides the foundation upon which Stein built his indicator of the speculative behavior of the professional risk-bearers. The operational indicator devised by Stein is designed to indicate the behavior of the professional risk-bearers not only during speculative periods, i.e., "when the

Portfolio Balance and Balance of Payments Sterilization

Abstract: Current interest in the monetary theory of the balance of payments has spurred interest in both the static and dynamic and effects of central bank sterilization policies.— In particular, the monetary approach to the balance of payments demonstrates that an improper rate of monetary expansion will lead to an official settlements deficit or surplus. As sterilization policies alter the rate of growth of the domestic money supply, it is important to determine how sterilization affects the balance of payments. The ongoing debate concerning the relative merits of fixed versus flexible exchange rates also serves to underline the importance of balance of payments sterilization. Proponents of flexible exchange rates argue that monetary independence cannot be attained under a pegged rate regime, whereas advocates of fixed rates claim that sterilization can lead to monetary independence even if the exchange rate is pegged.

Alternative exchange-rate systems: another look at the Modigliani-Askari analysis

Abstract: For better or for worse the world has drifted into a system of managed floating exchange rates. However, despite a series of economic and political shocks, the experience with floating rates has been reassuring. Recent history provides an interesting backdrop to the Modigliani-Askari argument for short-run “exchange-rate fixity”, coupled with long-run “exchange-rate variability”. Their case for sliding parities, as compared with either floating rates or infrequently-adjusted fixed rates, is new and thought provoking. Nonetheless, the present work argues that this case fails to withstand careful examination. According to the authors, reasonably clean floating rates remain the superior option.