Showing papers on "Exchange rate published in 1978"

Optimal Foreign Exchange Market Intervention

Abstract: The problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature. The optimal exchange-rate policy is one of permitting the appropriate degree of exchange-rate flexibility rather than one of complete fixity or complete flexibility of the exchange rate. Although the problem of the optimal exchange-rate regime has been analyzed in these terms before, criteria previously employed, emphasizing the geographical or functional location of disturbances, are seen to be inappropriate for a portfolio balance model with some degree of capital mobility.

Determinants of Exchange Rate Practices

Abstract: THE BREAKDOWN OF THE BRETTON WOODS par value system resulted in the de facto adoption of a wide variety of exchange rate systems. Each country's freedom to choose the exchange rate arrangements best suited to its needs was subsequently codified in Article IV of the Second Amendment to the Articles of Agreement of the International Monetary Fund. The choice of an appropriate exchange rate system is of great importance to a country as it will have important implications for the conduct of its domestic and international economic policy. The choice of an exchange rate regime might be a relatively simple exercise if countries were faced only with the classical textbook dichotomy of floating and fixed exchange rates. It is well known that some countries with ostensibly floating exchange rates intervene regularly in the foreign exchange market to stabilize the rate, whereas others with pegged exchange rates avail themselves of such wide intervention margins that the currency's value is determined within very wide limits by market forces. The choice is further complicated by the wide variety of pegging arrangements that have been adopted by diSerent countries. Indeed, sometimes there exists a serious problem in defining unambiguously whether a country's currency is basically floating or pegged. For instance, the countries adhering to the European currency snake1 are referred to both as

The Economics of exchange rates : selected studies

Abstract: 1. A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence Jacob A.Frenkel 2. The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy Rudiger Dornbusch 3. The Exchange Rate, the Balance of Payments and Monetary and Fiscal policy Under a Regime of Controlled Floating Michael Mussa 4. Contracting and Spurious Deviations From Purchasing-Power Parity Stephen P. Magee 5. Rational Expectations and the Exchange Rate John F. O. Bilson 6. An Empirical Analysis of the Monetary Approach to the Determination of the Exchange Rate Robert J. Hodrick 7. Exchange Restrictions and the Monetary Approach to the Exchange Rate Mario I Blejer 8. Tests of Forecasting Models and Market Efficiency in the International Money Market Richard M. Levich 9. Risk, Information and Forward Exchange Rates Alan C. Stockman 10. A Stock Adjustment Approach to Monetary Policy and the Balance of Payments Junichi Ujiie 11. Devaluation in an Empirical General Equilibrium Model Kenneth W. Clements

A Stochastic Equilibrium Model of an Open Economy Under Flexible Exchange Rates

Abstract: I. Setup of the model, 149. — II. Determination of the exchange rate and the expected future exchange rate, 154. — III. Effects of exogenous variables, 156. — IV. Incomplete current information, 159. — V. Concluding remarks, 161.

Further Evidence on Expectations and the Demand for Money During the German Hyperinflation

Abstract: Probably no event in monetary history has been more studied than the German hyperinflation of the early 1920's Economists have been attracted to study this episode since it provides an environment that is close to a controlled experiment which is so rare in the study of social sciences This paper provides further evidence on the role of expectations in effecting the demand for money during the German hyperinflation One of the difficulties in studying empirically the role of expectations is the lack of an observable variable measuring expectations This paper examines three measures of expectations that are derived from observed data from the market for foreign exchange The first measure is based on the hypothesis that the forward exchange rate measures the expected future spot exchange rate and thereby provides an observable measure of the market's expectations concerning the depreciation of the currency The other two measures distinguish between the forward exchange rate and the expected exchange rate and are based on the supplementary hypothesis that rational behavior requires expectations to be unbiased Accordingly, the measures of expectations are constructed by using the forward exchange rate along with the information on the systematic relationship between forward and spot exchange rates The various measures are then used in estimating the demand for money The emphasis on measures of expectations that are based on data from the foreign exchange markets reflects the belief that in an inflationary economy with flexible exchange rates one of the relevant substitutes for holding domestic money is foreign exchange

Short-run and Long-run Effects of External Disturbances Under a Floating Exchange Rate

Abstract: number of ways. Both in the short run and in the long run the model respects the flow of funds and balance sheet identities or stock-flow constraints that characterize all properly specified sequential temporary (or momentary) general equilibrium,1 open-economy models with money and other financial claims. The so-called "monetary" approach to the balance of payments represents the simple end of the wide spectrum occupied by this class of models.2 The determination of the level of real economic activity and of the current account balance is consistent with the absorption approach.3 The role of import and export price elasticities in the determination of the trade balance is clearly brought out.4 In spirit the model has a close affinity to the ideas developed by Turnovsky (1977). The economy is "small" (i.e., a price-taker) in the international financial market and in the markets for its imports, but can affect the world price for its exports. The short-run behaviour of the economy is "Keynesian". The money wage and the price of domestic output are sticky. Domestic output is determined by effective demand. As time passes, both the money wage and the price of domestic output respond to excess demand pressures. The long-run, steady-state properties of the model are those of a strictly classical growth model. The model is specified in such a way as to bring out very clearly the importance for the adjustment process of relative price changes. Both exogenous and endogenous changes in relative prices are considered. Changes in the terms of trade will affect the economy by altering real income and real wealth as well as via "substitution" effects. In monetary models of the balance of payments, exchange rate changes affect private spending and portfolio allocation decisions via the wealth effects of the changes in the general price level that they bring about. Depreciation increases the domestic currency price of traded goods. This reduces the real value of the nominal stock of money balances (and of any other nominally denominated private assets). This inflationary effect of

Alternative trade strategies and employment in LDC's

Abstract: The 1970s have witnessed significant changes in the trade policies and strategies of many LDCs. In the 1950s and 1960s most of them adhered to policies of import substitution behind highly restrictive quantitative controls, intensified by overevaluation of the exchange rate with attendant disincentives for export. In the past decade, there has been a marked reduction in the degree of bias toward import substitution. Even in countries where quantitative restrictions and tariffs continue to provide inducements for production for the domestic market much greater than incentive for sale abroad, bias is less extreme than in the past. In other countries, notably Brazil and South Korea, bias has been completely reversed, to a point where one might even claim a bias towards the foreign market and against the home market. This shift in trade policies has resulted from a number of factors, some specific to individual countries, but chiefly because of evidence that the excesses of import substitution were detrimental to growth.

Estimation of export demand functions for u.s. wheat

Abstract: Export demand functions for U.S. wheat were estimated for five world regions. Estimates of the effects of income, price, and nonprice variables on U.S. wheat exports were obtained using various econometric procedures. The major finding of the paper indicates that exchange rate changes have had a substantial impact on U.S. wheat exports. This result, conditioned on the aggregative nature of the study, supports the belief expressed by some researchers in recent years.

Exchange Rate Policies for Developing Countries: Some Simple Arguments for Intervention

Abstract: Exchange-rate strategies may be used to pursue the most varied objectives as instruments of development policy or of structural adjustment. The following article will examine the advantages and disadvantages of a number of exchange-rate policy options.

Diverse Information and Market Efficiency in a Monetary Model of the Exchange Rate

Abstract: Tests of informational efficiency of a given market involve testing two hypotheses simultaneously: the first is the hypothesis about the structure determining equilibrium prices or returns, and the second is the hypothesis about the information used in formulating expectations and the ability of agents to set current prices to conform with their expected values. We examine this issue in the context of the foreign exchange market by setting up a simple model of exchange rate determination, and using equilibrium properties of the model to examine market efficiency. The model of exchange rate determination involves monetary equilibrium and rational expectations. By virtue of the latter, equilibrium prices, by definition, 'fully reflect' available information, yet we show that conventional tests of market efficiency would fail when confronted by data generated by such a model. We then proceed to define more restrictive and more appropriate concepts of informational efficiency. We also illustrate and clarify a fundamental misconception with current rational expectations models. We believe that the current models employing the rational expectations hypothesis overemphasize the distinction between monetary and real shocks and underemphasize the distinction between permanent and transitory distinctions. For expectations formation, the conventional efficiency tests, it is the latter distinction that is the essential one.

Exchange Rates in the 1920'S: A Monetary Approach

Abstract: Current views about flexible exchange rate systems are based, to a large extent, on the lessons from the period of the 1920's during which many exchange rates were flexible. This paper re-examines the evidence from the perspective of the recently revived monetary approach (or more generally, asset-market approach) to the exchange rate. The analysis starts by developing a simple monetary model of exchange rate determination. The key characteristic of the model lies in the notion that, being a relative price of two monies, the equilibrium exchange rate is attained when the existing stocks of the two monies are willingly held. The equilibrium exchange rate is shown to depend on both real and monetary factors which operate through their influence on the relative demands and supplies of monies. The analysis then proceeds to examine the relationship between spot and forward rates for the Franc/Pound, Dollar/Pound and Franc/Dollar exchange rates and the results are shown to be consistent with the efficient market hypothesis. The monetary model is then estimated using monthly data and using the forward premium on foreign exchange as a measure of expectations. In addition to the single-equation ordinary-least-squares estimates, the various exchange rates are also estimated as a system using the mixed-estimation procedure which combines the sample information with prior information which derives from the homogeneity postulate and from known properties of the demand for money. The various results are shown to be consistent with the predictions of the monetary model.

Foreign Interest Rates in American Financial Markets: A Revised Series of Dollar-Sterling Exchange Rates, 1833–1900

Abstract: This paper offers a revised series of nineteenth-century Anglo-American foreign exchange rates. The new series is based partly on the reinterpretation of data presented earlier by other scholars and partly on a recently rediscovered source of continuous information on sterling-dollar rates after 1869. The pioneering work in this area was done by Lance Davis and Jonathan Hughes. They published in 1960 a quarterly dollar-sterling exchange rate series (1835 to 1895) based on the actual prices paid for approximately 3,000 sterling bills by Nathan Trotter's Philadelphia-based metals importing firm.

Financial Policies in an Open Economy

Abstract: The large number of countries now pursuing flexible rates justifies another look at the small-country case under such an exchange rate regime. The Metzlerian (1951) macro-model, which was opened up to world trade by Mundell (1961b), provides an elegant framework for the analysis. That model remains the workhorse for much of the research on both fixed and flexible exchange rates for economies that have capital and commodity mobility with the rest of the world (McKinnon and Oates, 1966; Johnson, 1969; Frenkel, 1971; Dornbusch, 1973; Mussa, 1974; Parkin, 1974; Boyer, 1975). Recent research in related areas, in particular the disaggregation of commodities into traded and non-traded goods, permits a number of simplifications of that basic framework without restricting its generality. These simplifications allow greater attention to be paid to some aspects of the model that have been criticized in the past, notably the specification of the capital account (Willett and Forte, 1969). To meet these criticisms the model presented here has a portfolio balance conception of the asset markets. Within such a context it is possible to consider an element that has been neglected in the analysis of flexible exchange rates: the effects of the capital gains or losses from a change in the exchange rate. These capital gains, which assumed great importance recently because of large foreign currency borrowing, depend crucially upon the currency composition of domestic portfolios immediately before any exogenous shock. With the incorporation of capital gains into the portfolio balance model, the equilibrium is none the less uniquely dependent upon the values of the system parameters so long as the economy is not a substantial debtor in foreign currency-denominated market instruments (Tower, 1972). However, the popular assumption that the money market equilibrium condition is independent of the exchange rate is justified only when the economy's net holdings of foreign currency market instruments is zero. Section II analyses the effects of financial policies under flexible exchange rates. A simple diagrammatic apparatus is developed there in order to portray these results. Section III introduces the fixed exchange rate version of the model and shows how this exchange rate regime can be incorporated into the diagram used above. Financial policies under this exchange rate regime are considered in Section IV, where a comparison is made of their potency under alternative exchange rate regimes. Section V provides a conclusion. The conclusions of this analysis can be stated very briefly. The traditional results concerning the relative potency of financial policies in non-traded goods and traded bonds under alternative exchange rate regimes (Fleming, 1962; Mundell, 1963) continue to hold. In particular, it is demonstrated that the conclusion that fiscal policy has no effect on the price level under flexible exchange rates depends on the economy's having a zero net position in

Competing Monies, European Monetary Union and the Dollar

Abstract: Since I am going to criticise the All Saints’ Day Manifesto (see p. 37–43 and the attempt to achieve European monetary union by the creation of a parallel European currency, I should explicitly state at the outset that I am very sympathetic to the major thrust of the proposal. First of all, it represents an increased understanding and awareness that we must move towards a more predictable monetary framework. In addition, it clearly recognizes the economic forces that exist in favour of the establishment of a single unified currency within an interdependent trade area such as the European community.

Samuelson's consumption-loan model with country-specific fiat monies

Abstract: In this paper, we examine various exchange rate regimes, paying particular attention to what difference the monetary-fiscal policy choices of governments make. The exchange rate may be market-determined or fixed, and if fixed, either cooperatively or by one government alone. Further, capital controls may or may not apply. Our most important result, quite general, we believe, is that absent capital controls the equilibrium exchange rate of the floating rate regime is indeterminate. It makes no sense to advocate floating rates and unfettered international borrowing and lending.

Exchange Rates in The 1920's: A Monetary Approach

Abstract: Current views about flexible exchange rate systems are based, to a large extent, on the lessons from the period of the 1920's during which many exchange rates were flexible. This paper re-examines the evidence from the perspective of the recently revived monetary approach (or more generally, asset-market approach) to the exchange rate. The analysis starts by developing a simple monetary model of exchange rate determination. The key characteristic of the model lies in the notion that, being a relative price of two monies, the equilibrium exchange rate is attained when the existing stocks of the two monies are willingly held. The equilibrium exchange rate is shown to depend on both real and monetary factors which operate through their influence on the relative demands and supplies of monies. The analysis then proceeds to examine the relationship between spot and forward rates for the Franc/Pound, Dollar/Pound and Franc/Dollar exchange rates and the results are shown to be consistent with the efficient market hypothesis. The monetary model is then estimated using monthly data and using the forward premium on foreign exchange as a measure of expectations. In addition to the single-equation ordinary-least-squares estimates, the various exchange rates are also estimated as a system using the mixed-estimation procedure which combines the sample information with prior information which derives from the homogeneity postulate and from known properties of the demand for money. The various results are shown to be consistent with the predictions of the monetary model.

A Note on the Treatment of Foreign Exchange in Project Evaluation

Abstract: There is apparently still some unease concerning the analytical treatment of foreign exchange in the OECD or Little-Mirrlees (1968, 1974) manual (eg the recent review of Little and Mirrlees by Bottomley, 1975) What, for example, distinguishes the Little-Mirrlees shadow pricing rules for traded commodities from that of Dasgupta, Sen, and Marglin (1972) in the Unido manual, if anything? In the Unido approach, domestic (non-traded) resources are evaluated by the domestic "willingness to pay", and foreign exchange used or earned via traded goods is evaluated using a shadow price of foreign exchange Little-Mirrlees, on the other hand, dispense with a shadow price of foreign exchange by evaluating traded goods at world prices and non-traded goods at their "foreign exchange equivalent" It has been suggested that when Unido uses a uniform shadow exchange rate for all tradeables and Little-Mirrlees use a single conversion rate for nontradeables they are equivalent, differing only in the choice of numeraire, the numeraire in Little-Mirrlees being foreign exchange and in Unido domestic consumption (eg Dasgupta, 1972; Scott, 1974) The purpose of this note is to clarify the analytical underpinnings of the two methods of treating foreign exchange using a very simple general equilibrium model of the economy In this way, we shall be able to establish the essential similarities and differences between the two approaches and to infer what implicit assumptions are being made by each Both were, of course, written primarily for practitioners of project evaluation, and their comparative usefulness depends to a certain extent upon the practical ease with which they may be applied Our interest is of a purely theoretical nature It is simply to clarify the analytical bases for the two sets of rules Our model is a static general equilibrium neoclassical model with an exportable, an importable, a non-traded good and two factors (labour and capital) The only distortions are taken to be tariffs on the traded goods These could equally well be interpreted as quotas or any other distortion that makes the domestic and world prices different Consumption and production taxes could easily be added to the model at the expense of simplicity Since they add little to the result they are omitted In order to concentrate solely on the foreign exchange issue we have ignored several other problems raised in both manuals and elsewhere-the qualitative distinction between traded and non-traded goods, distortions on the capital market (shortage of savings), the shadow price of labour in a dual economy, and income distribution issues No problems of a dynamic nature are considered

The balance of payments constraint

Abstract: The first of these quotations is a vivid description of the situation during the period of fixed exchange rates and full employment which lasted from 1950 to 1966. During these years it certainly seemed to be the case that macroeconomic policy largely consisted of expanding demand until our foreign exchange reserves came under pressure, and then of restricting demand until unemployment became uncomfortably high, by which time the pressure on the reserves had gone. So, once again, demand could be safely expanded until … This was the famous stop—go cycle. Viewed in retrospect, one wonders why we grumbled about it so much. Unemployment was kept very low, growth was, by our own historical standards if not by those of contemporary Western countries, high, and fluctuations in output were smaller than in many other countries. Hence, although the balance of payments did seem to limit our power to stimulate demand and reduce unemployment, the limitation does not now appear to have been a very serious one.

An empirical study of world market influences on price formation in West Germany

Abstract: In this paper price and wage determination is analyzed for 35 industries in West-Germany. Tests are made to classify industries as being competitive, discriminatory or sheltered. The chosen approach is related to the “Scandinavian” model.