Showing papers on "Exchange rate published in 1977"

A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations

Abstract: This paper analyzes a two-sector model of exchange rate determination for a mall open economy with flexible prices. Residents are assumed to hold both domestic and foreign currency and to have rational expectations. The model satisfies the homogeneity postulate but it is shown that an increase in the rate of expansions of money supply leads to an instantaneous deterioration of the real exchange rate. In the long run, however, the latter moves back to its previous level.

Price Behavior in the Light of Balance of Payments Theories

Abstract: The purpose of this paper is to describe the behavior of that subset of prices and price indexes that is relevant to the theory of balance of payments adjustment. The theoretical writings on the balance of payments may be viewed at this juncture as falling into two main groups -- the "standard" theories and the more recent monetary theories. Each of these is examined to determine the assumptions and predictions made about particular kinds of prices, and the empirical evidence regarding these prices is then set out. Although some assessment of the theories -- solely from the price aspect -- is offered, the emphasis is on the price structure and price behavior that ought to be captured in a satisfactory theory of the mechanisms of international adjustment. For pragmatic reasons, attention is placed mainly on the theory relating to exchange rate changes rather than on the explanation of adjustment with fixed exchange rates.

Differential responses to price and exchange rate influences in the foreign trade of selected industrial countries

Abstract: THE speed with which a country's imports and exports respond to exchange rate changes and inflation at home and abroad has important policy implications, but most of the work in this area has been somewhat conjectural. Some writers have pointed out that under a fixed exchange rate system, import and export flows may respond differently to price changes that result from changes in exchange rates than to those resulting from changes in national currency prices of exportable goods. Orcutt (1950, pp. 541-542) noted that trade flows may respond differently to small and temporary changes in prices than to large and fairly permanent changes, such as those caused by a devaluation. Among others, Leamer and Stem (1970, p. 34) interpreted Orcutt's point to mean that adjustment to large price changes stemming from devaluations will be more rapid than adjustment to small changes, but the long-run adjustment would be the same. Junz and Rhomberg (1973, p: 413) adduce reasons why the short-run response to a devaluation could be either faster than the response to a price change, because of the usually larger size of par value changes and the publicity that surrounds them, or slower, because of the large resource shifts necessary to correct large disequilibria that have accumulated over some period of time. The empirical evidence on the above suppositions appears inconclusive. Both T. C. Liu (1954) and Goldstein and Khan (1976) searched for evidence that trade flows responded differently to large than to small price changes. Although some of Liu' s results indicated the presence of a "quantum effect," Goldstein and Khan found that neither the size of the price elasticity nor the speed of adjustment seemed related to the size of the change in prices. Neither of these studies tested exchange -rate effects directly. The only direct test for different responses of trade flows to changes in prices and exchange rates is the 1973 study by Junz and Rhomberg. Using a pooled sample of 13 industrial countries, they concluded that the response to exchange rate changes is very similar to the response to price changes measured in local currency. The Junz-Rhomberg method, however, has certain shortcomings: they measure market-share changes, not trade flows directly; pooling the sample imposes the same parameters on each country in the pool; and measuring partial correlations with price and exchange rate variables lagged one period at a time yields no picture of the length or shape of the full response pattern through time. In this paper we estimate directly price and exchange rate response patterns, using quarterly import and export equations for six major industrial countries during the Bretton Woods period. Our results support two general conclusions: (a) the length of the full response lags on exchange rates during the fixed-rate period tended to be shorter than for changes in prices; and (b) the initial impact of exchange rate changes on trade flows tended to be greater than that of price changes.

Differential Responses to Price and Exchange Rate Influences in the Foreign Trade of Selected Industrial Countries

Abstract: THE speed with which a country's imports and exports respond to exchange rate changes and inflation at home and abroad has important policy implications, but most of the work in this area has been somewhat conjectural. Some writers have pointed out that under a fixed exchange rate system, import and export flows may respond differently to price changes that result from changes in exchange rates than to those resulting from changes in national currency prices of exportable goods. Orcutt (1950, pp. 541-542) noted that trade flows may respond differently to small and temporary changes in prices than to large and fairly permanent changes, such as those caused by a devaluation. Among others, Leamer and Stem (1970, p. 34) interpreted Orcutt's point to mean that adjustment to large price changes stemming from devaluations will be more rapid than adjustment to small changes, but the long-run adjustment would be the same. Junz and Rhomberg (1973, p: 413) adduce reasons why the short-run response to a devaluation could be either faster than the response to a price change, because of the usually larger size of par value changes and the publicity that surrounds them, or slower, because of the large resource shifts necessary to correct large disequilibria that have accumulated over some period of time. The empirical evidence on the above suppositions appears inconclusive. Both T. C. Liu (1954) and Goldstein and Khan (1976) searched for evidence that trade flows responded differently to large than to small price changes. Although some of Liu' s results indicated the presence of a "quantum effect," Goldstein and Khan found that neither the size of the price elasticity nor the speed of adjustment seemed related to the size of the change in prices. Neither of these studies tested exchange -rate effects directly. The only direct test for different responses of trade flows to changes in prices and exchange rates is the 1973 study by Junz and Rhomberg. Using a pooled sample of 13 industrial countries, they concluded that the response to exchange rate changes is very similar to the response to price changes measured in local currency. The Junz-Rhomberg method, however, has certain shortcomings: they measure market-share changes, not trade flows directly; pooling the sample imposes the same parameters on each country in the pool; and measuring partial correlations with price and exchange rate variables lagged one period at a time yields no picture of the length or shape of the full response pattern through time. In this paper we estimate directly price and exchange rate response patterns, using quarterly import and export equations for six major industrial countries during the Bretton Woods period. Our results support two general conclusions: (a) the length of the full response lags on exchange rates during the fixed-rate period tended to be shorter than for changes in prices; and (b) the initial impact of exchange rate changes on trade flows tended to be greater than that of price changes.

Stability and Exchange Rate Systems in a Monetarist Model of the Balance of Payments

Abstract: The fixed versus floating exchange rates debate appears destined for as long a life as any of the standing controversies in economics. The standard arguments are outlined by Johnson (1969) and Kindleberger (1969). This paper focuses on the effects of the exchange rate system on economic stability. We construct a simple model in which real disturbances affect the level of output each period and nominal disturbances affect the demand for money, and examine the resultant variability of the rate of consumption and the price level in a single country and in a two-country world under regimes of fixed and of floating exchange rates.

Exchange Rate Dynamics with Stock/Flow Interaction

Abstract: The paper examines the adjustment of the exchange rate and domestic prices to a monetary change under flexible exchange rates. The emphasis is on the dynamic interaction between the classical stock aspects, stressed by the monetary approach, and the flow aspects, stressed by the elasticity approach. It is shown that even in a very simple model of lagged asset adjustment the interaction between trade and capital flows can produce a large variety of adjustment paths, with and without overshooting, monotonic and cyclical.

Macroeconomic analysis and stabilization policies

Abstract: Preface 1. introduction and overview Part I. The Closed Economy: 2. Review of basic macroeconomic model 3. The formulation of a consistent macroeconomic model 4. the dynamics of the government budget constraint 5. The wage-price sector 6. A short-run integrated macroeconomic model 7. An intermediate ruin macroeconomic model 8. A long run model Part III. The Open Economy: 9. Review of static macroeconomic models of a small open economy 10. Imported inflation and government policies in a short-run open macroeconomic model 11. The dynamics of an open economy with fixed exchange rate and fixed prices 12. Imported inflation and government policies in a dynamic open macroeconomic model Part III. Stabilization Policies: 13. An introduction to stabilization theory and policy 14. Optimal stabilization theory Notes References Index.

International Investment and Interest Rate Linkages under Flexible Exchange Rates

Abstract: One of the main arguments against the Bretton Woods system of pegged exchange rates was that it seriously limited the freedom of Central Banks, with the exception of that of the United States, to use monetary policy for domestic stabilisation. With the growth of the Eurocurrency markets and other channels of international investment interest rates in different countries tended to be equalised by arbitrage, except at times of speculation when substantial margins developed in an anticipation of an exchange rate change. The other side of the same phenomena was the problem of ‘offsetting capital flows’. An independent tightening (or easing) of monetary policy in some country would induce an inflow (outflow) of capital that would offset, at least partially, the intended effect of the policy on the monetary base. The other two manifestations of this lack of monetary independence were the transmission of external business cycles and in particular the problem of imported inflation. In principle the first problem could have been taken care of by the assignment of fiscal policy to domestic stabilisation but in none of the major industrial countries could fiscal policy be flexibly used for this purpose. The result was the recurrence of situations of conflict between external and domestic objectives of monetary policy, bound to arise when one instrument is used to achieve two targets.

Exchange rate policies for developing countries

Abstract: Publisher Summary This chapter discusses the exchange rate policies for developing countries. Developing countries have generally favored adjustable par values as the basis for the world exchange rate system. This has been apparent both in their attitude in negotiations on reform of the international monetary system and in their reactions to the exchange rate developments of recent years. Most developing countries have, in the management of their own exchange rates, maintained a fixed peg against a single intervention currency, though a significant minority have moved to floating exchange rates or have pegged their rates to a basket of currencies. The case for flexible or floating exchange rates versus a system of adjustable par values has usually been made abstracting from the level of development of countries. The chapter discusses the differentiating characteristics of developing countries that may affect their preference for a particular exchange rate system. It discusses various possible policy reactions of developing countries to the current situation, where the industrial nations' currencies are floating.

Currency of Invoicing in Merchandise Trade

Abstract: Almost all trade among industrial countries is now invoiced in the currency of one of the trading partners, normally that of the exporter. Use of a 'third country currency' (normally the dollar) is important only in trade with developing countries. Except for the decline in sterling's use as an international currency, there is no evidence that exchange rate expectations are a strong influence on traders' choice of currency.

Nontraded Goods and Macroeconomic Policy Under a Fixed Exchange Rate

Abstract: I. Introduction, 469—II. The analytical framework, 469.—III. Fiscal policy, 473.—IV. Exchange rate adjustments, 475.—V. Summary, 478.—Appendix A: Proof of Proposition 1,479.—Appendix B: Proof of Proposition 2,480.

Foreign exchange market efficiency under flexible exchange rates

Abstract: This paper presents an empirical analysis of spot exchange rate behavior subsequent to this decision. Its purpose is to test whether the price changes of the Canadian dollar, German mark and British pound conformed to those which would be expected in an efficient market (i.e. a weak random walk model). It is shown that the efficient market hypothesis may be accepted for the German mark and the British pound but should be rejected for the Canadian dollar. These results may be compared with those of Poole [14] and Pippenger [13]. Poole concluded that a random walk model did not fit exchange rate data for the 1920's, 1930's and 1950's. Pippenger, in reviewing the same time period, also found evidence of dependency but concluded that overall, the foreign exchange markets were reasonably efficient.

The Exchange Rate, The Balance Of Payments and Monetary and Fiscal Policy Under A Regime of Controlled Floating

Abstract: This paper considers the extension of the fundamental principles of the monetary approach to balance of payments analysis to a regime of floating exchange rates, with active intervention by the authorities to control rate movements. It makes four main points. First, the exchange rate is the relative price of different national monies, rather than national outputs, and is determined primarily by the demands and supplies of stocks of different national monies. Second, exchange rates are strongly influenced by asset holder’s expectations of future exchange rates and these expectations are influenced by beliefs concerning the future course of monetary policy. Third, “real” factors, as well as monetary factors, are important in determining the behavior of exchange rates. Fourth, the problems of policy conflict which exist under a system of fixed rates are reduced, but not eliminated, under a regime of controlled floating. A brief appendix develops some of the implications of “rational expectations” for the theory of exchange rates.

Monetary and Fiscal Policies under Flexible Exchange Rates and Perfect Myopic Foresight in an Inflationary World

Abstract: This paper develops a dynamic macroeconomic model under flexible exchange rates and perfect capital mobility in which like much of the recent literature, exchange rate expectations and inflationary expectations play an important role. We discuss both the short-run equilibrium of the system and its steady state which accounts for the dynamics of wealth accumulation. Several of our conclusions are in marked contrast to the corresponding propositions derived from the conventional static model. Three aspects of our specification are mainly responsible for this. These include the assumption of perfect myopic foresight; the related fact that our analysis proceeds in terms of the rate of change of the exchange rate; and the inclusion of real a8set earnings in our definition of real disposable income.

Floating exchange rates and international monetary reform

Abstract: This book traces the role of exchange rate arrangements in the evolution of the international monetary system.

Expectations and the Behaviour of Prices and Output under Flexible Exchange Rates

Abstract: A good deal of recent work in the tradition of the monetary approach to balance of payments theory under fixed exchange rates views reserve flows, not as transmitting inflationary impulses, but as accommodating the behaviour of the domestic money supply to variations in the inflation rate brought about by other means A direct "price transfer mechanism", justified in earlier analysis by making the small open economy a price-taker in world markets, at least for tradable goods, and in more recent work by having inflation expectations, and hence domestic price setting, influenced by the behaviour of inflation in the rest of the world, is instead regarded as the important channel whereby inflation is transmitted between open economies operating fixed exchange rates Moreover, a considerable amount of empirical evidence consistent with the operation of such a mechanism has accumulated in recent years1 The above work deals with a regime of fixed exchange rates This paper is concerned with investigating what the existence of a price-transfer mechanism implies about the view that a freely floating exchange rate provides complete insulation against nominal shocks originating abroad This view, after all, is based upon the hypothesis that, in severing the link between the domestic money supply and any foreign variables, such an exchange rate regime cuts off the only channel whereby such shocks can be imported The analysis is carried out with the aid of an open economy version of a macroeconomic model which combines the quantity theory of money with an expectations augmented Phillips curve2 It is shown that only in the long run does a flexible exchange rate regime in general guarantee the insulation of the economy from nominal shocks arising in the rest of the world In the short run, the extent to which a flexible exchange rate can insulate domestic output and inflation from the consequences of variations in the world inflation rate turns out to depend crucially upon how inflation expectations are formed The presence of a price transfer mechanism can undermine the insulating properties of flexible rates As to the economy's response to variations in the domestic monetary expansion rate, it is only in the long run that this always takes the form of a change in the domestic inflation rate In the short run the responses of output and inflation to such a variation also depend upon the inflation expectations mechanism embodied in the model

On the Political Economy of Monetary Integration: A Public Economics Approach

Abstract: One of the fundamental problems of international monetary relations is how and to what extent national economies should be incorporated into monetary unions. A main concern of the countries belonging to the European Community is the process of their monetary integration. For the world as a whole, the basic question is whether a subset of countries—or all the nations —should unite into a single currency area with fixed exchange rates or each nation should remain as an independent currency area with floating exchange rates.1

Interrelations Between Domestic and International Theories of Inflation

Abstract: National governments are held responsible by their electorates for the attainment of full employment, price stability, and real economic growth. Conflicting guidance for policy-makers is provided by two quite different approaches to inflation theory, the first school of thought which is based on the domestic Phillips curve as the fundamental driving force of inflation with little or no reference to external influences, and the second approach of the ‘monetary theory of the balance of payments’, in which the only determinants of domestic inflation are the rate of change of the exchange rate and of world prices.

Export Prices and Exchange Rates

Abstract: The present paper is intended to make a modest contribution to an under-standing of one small but important link in this complicated chain of interacting factors. It is a link that has often been ignored because strong simplifying assumptions have until very recently usually been made about it. We refer to the relation of exchange rate changes, export prices, and domestic prices. During the last few years a number of attempts have been made to examine the extent to which exchange rate changes were "passed through"; that is, the extent to which a given depreciation in the U.S. dollar, for example, resulted in a corresponding decline in the price of U.S. exports in foreign currencies. However, the possibility that a change in the exchange rate might also alter the relationship between the export price and the domestic price of a given product, expressed in the same currency, has been almost completely ignored. The assumption made, implicitly by most past writers in the theory of international trade and more recently explicitly by advocates of the monetary approach to the balance of payments, has been that the "law of one price" applies to shipments destined for home markets and for foreign markets.

The spatial distribution of tourism demand and exchange rate variation: OECD European countries

Abstract: The purpose of this communication is to contribute to the understanding of the causes of the variation in the regional distribution of the demand for tourism in OECD countries. Our contention is that exchange rate fluctuations since 1970 have strongly influenced both cyclical and long‐term patterns of international tourism behaviour. Except for works by Gerakis and Artus the literature covers this aspect only marginally. However, their pioneering econometric analyses do not satisfy a number of fundamental objections to the measurement of tourism demand.

Effects of Major Currency Realignment of Philippine Merchandise Trade

Abstract: THE quantitative analysis of some economic effects of changes in exchange rates of the world's key currencies has been the subject of a few recent empirical studies,1 inspired presumably by the greater flexibility in currency exchange rates among developed countries that was initiated in the early part of this decade. Relatively large-scale equation systems are employed that take into account the simultaneous interaction among prices, incomes and spending in the world economy usually divided into a number of developed countries and a Crest of the world" category, the latter subsuming the less developed countries (LDCs). In the context of a small LDC, however, the complexity of the problem is somewhat reduced by the exogeneity of export and import prices (expressed in foreign currency) and the market concentration of LDC foreign trade typically in only a few developed countries. The Philippines is a case in point, about three-fourths of its trade flows throughout most of the post-war period being accounted for by Japan and the United States; moreover, certain principal trade commodities are dependent to a significant degree on only one or two dominant markets. Currency realignments involving these two countries, as exemplified by the 1971 Smithsonian Agreement, represent, therefore, a new form of external economic disturbance which may have significant repercussions on the country's balance of payments, output growth, income distribution and other policy objective variables. In this paper we attempt an evaluation of the direct effects on Philippine merchandise trade of the 1971 realignment of major currencies and the Central Bank decision to keep the exchange rate of the domestic currency (peso) fixed with respect to the U.S. dollar. First, a simplified framework of analysis is presented that identifies the parameters to be estimated for a quantitative assessment of the trade effects. We then estimate export supply and import demand functions for various trade commodities using annual data in the postwar period. The price coefficient estimates, together with the geographic distribution of Philippine trade flows in 1970, provide the empirical basis for examining the quantitative effects on Philippine merchandise trade of the altered sets of peso export and import prices attributable to the 1971 exchange rate changes.