Showing papers on "Exchange rate published in 1992"

Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985

Abstract: The long run trade orientation of an economy is measured in this article by an index which measures the extent to which the real exchange rate is distorted away from its free trade level by the trade regime The technique for estimating a cross country index of real exchange rate distortion uses the international comparison of prices prepared by Robert Summers and Alan Heston Resource endowment constitutes the norm and real overvaluation or undervaluation relative to this norm reveals whether incentives are directed to the domestic or international market The index is constructed based on data for GDP/capita average price level in US dollars 1976-85 and GDP growth rate/capita 1976-85 Other sections are devoted the comparison of the procedure for 117 countries between 1976-85 and an examination of the empirical relationship between outward orientation and economic growth and sensitivity analysis The results indicate that Latin America generally was overvalued by 33% relative to Asia and Africa was overvalued by 86% The real exchange rate distortion index supports the view that Asian countries are more outward oriented Asian economies have lower price levels which reflect relatively modest protection and incentives oriented to external markets Latin American countries with moderately high price level and African countries with very high price levels reflect strong protection and incentives directed to production for the domestic market An alternative specification which eliminates the dummy variables for Africa yields similar results with slightly lower magnitude; ie overvaluation is 60% instead of 86% for Africa and Latin America is overvalued by 39% instead of 33% over Asia A table is provided which indicates by country the distortion and variability of the real exchange rate the GDP growth the 1976 GDP/capita and the investment rate Another finding was that there is a significant negative relationship between distortion of the real exchange rate and growth of GDP/capita after controlling for the effects of real exchange rate variability and investment level with both the original specification and the alternative The growth rate/capita of Latin American and African countries would increase 15-21% with a shift to move outward oriented trade policies This gain as well as devaluation of the real exchange reate trade liberalization and maintenance of a stable real exchange rate would contribute to positive growth rates In the analysis of the poorest 24 countries the result was that only rate distortion and not variability and investment rate explained the growth rate The gain for Ghana for example of adopting the trade policies and exchange rate of Bangladesh would be 5% to its growth

Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World

Abstract: Two homogeneous stocks of physical capital are located in two different countries, separated by an "ocean." They are consumed by local residents, invested in a random production process yielding real returns, or transferred abroad. Under proportional transfer costs, trade, consumption, and capital imbalances are shown to be persistent. The heteroskedastic process for the relative price of capital in the two countries has a nonlinear, mean-reverting drift. Nevertheless, the conditional probability of the price moving from the parity value of unity is greater than the probability of it moving toward parity. The real interest-rate differential incorporates a simple risk premium. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Industrial Structure and the Comparative Behavior of International Stock Market Indices

Abstract: Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.

International Comparisons of Pricing-to-Market Behavior

Abstract: This paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using U.S., U.K., German and Japanese industry-level data. Given the industries sampled more price discrimination across destinations is observed in the U.K., German and Japanese data. For industries that match across source countries, however, behavior is very similar across source countries. Furthermore, destination-specific price adjustment on exports to the U.S. from Germany and Japan is similar to price adjustment observed on shipments to other destinations. Most variation in the data appears to be related to industry.

Stock prices and the effective exchange rate of the dollar

Abstract: The literature on the relation between stock prices and exchange rates is very poor and includes few studies that have argued that exchange rate changes do effect stock prices.By relying on the portfolio approach to exchange rate determination, it is argued that a change in stock prices could also have an impact on exchange rates, i.e. there could be a two-way relationship between exchange rates and stock prices. Granger concept of causality as well as cointegration technique are employed to support this conjecture. The empirical results show that there is bidirectional causality between stock prices measured by S&P 500 index and the effective exchange rate of the dollar, at least in the short-run. The cointegration analysis reveals that there is no long-run relationship between two variables.

Monetary and Portfolio-Balance Models of Exchange Rate Determination

Abstract: “Monetary and Portfolio-Balance Models of Exchange Rate Determination” was a survey of empirical models of the 1970s, published in Economic Interdependence and Flexible Exchange Rates , edited by J. Bhandari (M.I.T. Press: Cambridge), in 1983. It is here supplemented with a brief epilogue to update the literature to 1987, including some skeptical observations on recent claims that “random walk” results constitute evidence in favor of an “equilibrium” model of the exchange rate.

Exchange Rate Economics: A Survey

Abstract: Two main views of exchange rate determination have evolved since the early 1970s: the monetary approach to the exchange rate (in flexible-price, sticky-price, and real interest differential formulations); and the portfolio balance approach. The literature on these views is surveyed, followed by a discussion of the empirical evidence and likely future developments in the area of exchange rate determination. The literature on foreign exchange market efficiency, exchange rates and "news," and international parity conditions is also reviewed.

One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union

Abstract: Executive Summary A: Synthesis and Economic Principles: Synthesis The Economics of EMU B: The Main Benefits and Costs: Efficiency Gains Benefits of Stable Prices Implications for Public Finance Adjusting without the Nominal Exchange Rate External Dimensions C: The Impact Through Time and Space: Transitional Issues Spatial Aspects National Perspectives on the Costs and Benefits of EMU Annexes: Exchange Transaction Costs Germany and the Netherlands: the Case of a de facto Monetary Union European and German Economic and Monetary Union: a Comparison Shocks and Adjustment in EMU: Simulations with the Quest Model Exchange Rate Regimes in the EC: Simulations with the Multimod Model

The Real Exchange Rate and Foreign Direct Investment in the United States: Relative Wealth vs. Relative Wage Effects

Abstract: There has been a significant correlation between inward foreign direct investment in the United States and the U.S. real exchange rate since the 1970s. Two alternative reasons for this relationship are that the real exchange rate affects the relative cost of production and that the real exchange rate alters reTative wealth across countries. In this paper we explore these alternatives by examining the determinants of four measures of inward foreign direct investment to the United States from seven industrial countries over the period 1979 to 1988. We find strong evidence that relative wealth significantly affects foreign direct investment in the United States. We find little evidence that relative wages have a significant impact on the determination of foreign direct investment in the United States. These results are robust to the choice of countries in our sample and when controlling for changes in tax codes.

Target Zones and Realignments

Abstract: Recent contributions emphasize that the presence of exchange-rate target zones has important effects on the within-band behavior of exchange rates when agents are forward-looking. The authors find that the implications of available models are inconsistent with European exchange-rate data, and they suggest that the frequent realignments occurring in the period they consider may be responsible for this. They construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence. Copyright 1992 by American Economic Association.

Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States

Abstract: The main aim of this paper is to estimate the extent to which the Federal Government of the United States insures member states against regional income shocks. We find that a one dollar reduction in a region's per capita personal income triggers a reduction in federal taxes of about 34 cents and an increase in federal transfers of about 6 cents. Hence, the final reduction in disposable per capita income is around 60 cents. That is, between one-third and one-half of the initial shock to the region is absorbed by the Federal Government. Taxes respond more strongly to regional imbalances than do transfers. The main mechanism at work is the federal income tax system, which implies that the stabilization process is automatic rather than specifically designed each time there is a cyclical movement in income. Some economists may argue that this regional insurance scheme, provided by the Federal Government, is an important reason why the US system of fixed exchange rates has survived without major difficulties. According to this view, Europeans who look to the United States as a model for Europe should seriously consider the creation (or expansion) of a federal fiscal system at the same time as they create a European Central Bank that issues a unified European currency. The creation of the latter without the insurance mechanism provided by the former could endanger the entire process of monetary unification. Approximate calculations of the impact of the existing European tax system on regional income suggests that a one dollar shock to regional GDP will reduce tax payments to the EC government by half a cent. Hence, the current European tax system has a long way to go before it reaches the 34 cents response of the US system.

An Interpretation of Recent Research on Exchange Rate Target Zones

Abstract: How do exchange rate bands work compared to completely fixed rates (between realignments); or, more precisely, what are the dynamics of exchange rates, interest rates, and central bank interventions within exchange rate bands? Does the difference between bands and completely fixed exchange rates matter, and if so, which of the two arrangements is best; or, more precisely, what are the tradeoffs that determine the optimal bandwidth? This article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones, with emphasis on main ideas and results and without technical detail.

Currency Substitution in Developing Countries: An Introduction

Abstract: This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.

Sources of Fluctuations in Real and Nominal Exchange Rates

Abstract: This paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates. The distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period: nominal shocks are required to have no permanent effect on the level of the real exchange rate. Given this identification scheme, the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates. The findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies. Copyright 1992 by MIT Press.

Is Japan Creating a Yen Bloc in East Asia and the Pacific

Abstract: This paper reaches seven conclusions regarding the Yen Bloc that Japan is reputed to be forming in Pacific Asia. (1) Gravity-model estimates of bilateral trade show that the level of trade in East Asia is biased intra-regionally, as it is within the European Community and within the Western Hemisphere, to a greater extent than can be explained naturally by distance. One might call these three regions 'super-natural' blocs, in contrast to Krugman's "natural" trade blocs. (2) There is no evidence of a special Japan effect. (3) Once one properly accounts for rapid growth in Asia, the statistics do not bear out a trend toward intra-regional bias of trade flows. (4) The world's strongest trade grouping is the one that includes the U.S. and Canada with the Asian/Pacific countries, i.e., APEC. (5) There is a bit more evidence of rising Japanese influence in East Asia's financial markets. Tokyo appears to have acquired significant influence over interest rates in a few Asian countries, though overall its influence is as yet no greater than that of New York. (6) Some of Japan's financial and monetary influence takes place through a growing role for the yen, at the expense of the dollar, The yen has become relatively more important in exchange rate policies and invoicing of trade and finance in the region. (7) But this trend is less the outcome of Japanese policy-makers' wishes, than of pressure from the U.S. government to internationalize the yen.

Stopping High Inflation: An Analytical Overview

Abstract: The evidence on stopping high inflation is interpreted in terms of an analytical framework. The evidence suggests that, by using the exchange rate as the nominal anchor, hyperinflations have been stopped almost overnight with relatively minor output costs. In contrast, exchange rate-based stabilizations in chronic-inflation countries have typically resulted in a sluggish adjustment of the inflation rate, sustained real appreciation of the domestic currency, current account deficits, and an initial expansion in economic activity followed by a contraction. These stylized facts are shown to be consistent with the predictions of a staggered-prices, cash-in-advance model.

Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate

Abstract: Conventional explanations of the near random walk behavior of real exchange rates rely on near random walk behavior in the underlying fundamentals (e.g.. tastes and technology). The present paper offers an alternative rationale, based on a fixed-factor neoclassical model with traded and non-traded goods. The basic idea is that with open capital markets, agents can smooth their consumption of tradeables in the face of transitory traded goods productivity shocks. Agents cannot smooth non-traded goods productivity shocks, but if these are relatively small (as is often argued to be the case) then traded goods consumption smoothing will lead to smoothing of the intra-temporal price of traded and non-traded goods. The (near) random walk implications of the model for the real exchange rate are in stark contrast to the empirical predictions of the classic Balassa-Samuelson model. The paper applies the model to the yen/dollar exchange rate over the floating rate period.

The sensitivity of bank stock returns to market, interest and exchange rate risks

Abstract: This paper presents and estimates a multifactor model of bank stock returns that incorporates market return, interest rate and exchange rate risk factors. A model of the optimizing behavior of an international banking firm is used to derive the sensitivity coefficients of the alternative factors. Regression equations are estimated that are based on either actual or unexpected values of the underlying factors with a post-October 1979 time dummy variable and with a money-center bank dummy variable. Standard results are obtained for the market and interest rate variables while new results are derived for the exchange rate variable. The specific effects of the latter variable are found to be dependent on the time period of observation and the money-center status of banks.

European Integration and the Demand for Broad Money

Abstract: Co-integration analysis and error-correction modelling show that a stable and predictable aggregate demand for broad money holds for the group of countries participating in the Exchange Rate Mechanism (ERM) of the European Monetary System. This result seems robust to different econometric techniques, samples and methods of conversion of national variables into ecus. Furthermore, ERM-wide equations compare favourably with national equations and with the previous estimates of area-wide equations for narrow money. These findings suggest that an area-wide broad monetary aggregate can play a useful role in the co-ordination of monetary policy at the European level.

Traded Goods Consumption Smoothing and the Random Walk Behavior of the Real Exchange Rate

Abstract: Conventional explanations of the near random walk behavior of real exchange rates rely on near random walk behavior in the underlying fundamentals (e.g., tastes and technology). The present paper offers an alternative rationale, based on a fixed factor neoclassical model with traded and nontraded goods. The basic idea is that with open capital markets, agents can smooth their consumption of tradeables in the face of transitory traded goods productivity shocks. Agents cannot smooth nontraded goods productivity shocks, but if these are relatively small (as is often argued to be the case) then traded goods consumption smoothing will lead to smoothing of the intra-temporal price of traded and nontraded goods. The (near) random walk implications of the model for the real exchange rate are in stark contrast to the empirical predictions of the classic Balassa-Samuelson model. The paper applies the model to the yen/dollar exchange rate over the floating rate period.

Models of Inflation and the Costs of Disinflation

Abstract: The focus of this analysis is on the output costs of disinflation. A model of inflation with both forward and backward elements seems to characterize reality. Such an inflation model is estimated using data for industrial countries, and the output costs of a disinflation path are calculated, first analytically in a simple theoretical model, then by a simulation of a global, multiregion empirical model. The credibility of a preannounced path for money consistent with the lowest output loss is considered. An alternative, more credible policy may be to announce an exchange rate peg to a low-inflation currency.

Is Europe an Optimum Currency Area

Abstract: An optimum currency area (OCA) is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely (Mundell, 1961). Insofar as regions within the OCA experience the same shocks, there is no obvious advantage to altering relative prices between them. Insofar as localized concentrations of unemployment nonetheless remain, the free mobility of labour from high- to low-unemployment regions can eliminate the problem. It is hence optimal to dispense with one of the principal instruments — changes in the exchange rate — traditionally used to effect relative price adjustments, and to reap the benefits, in terms of convenience and efficiency, of a common currency.

Capital Inflows and Real Exchange Rate Appreciation in Latin America

Abstract: The characteristfcs of recent capital inflows into Latin America are discussed. It is argued that these inflows are partly explained by conditions outside the region, like recession in the United States and lower international interest rates. This suggests the possibility that a reversal of those conditions may lead to a future capital outflow, fncreasing the macroeconomic vulnerability of Latin American economies. Policy options are argued to be lfmited.

Currency Substitution in Developing Countries: An Introduction

Abstract: This paper reviews the main policy and analytical issues related to currency substitution in developing countries. The paper discusses, first, whether currency substitution should be encouraged or not; second, how the presence of currency substitution affects the choice of nominal anchors in inflation stabilization programs; third, the effects of changes in the rate of growth of the money supply on the real exchange rate; fourth, the interaction between inflationary finance and currency substitution; and, finally, issues related to the empirical verification of the currency substitution hypothesis.

Structural adjustment and international trade in Eastern Europe: the case of Poland

Abstract: Poland Andrew Berg and Jeffrey Sachs The Polish economic programme is important not only in its own right, hut as a key example of the benefits and possible costs of a rapid movement to convertibility. This paper proposes an analytical framework and new estimates of the costs and benefits. The framework shows that convertibility revolves around the relationship of two nominal variables, the money supply and the nominal exchange rate. Return to convertibility is achieved not mainly through a real depreciation, but through a nominal depreciation which helps to bring the overall price level back into line with nominal aggregate demand and particularly with the money supply. The new estimates show that the costs, a drop in living standards and output, are less than commonly believed. Given the extreme inflationary conditions in 1989 and the shock following the disintegration of CMEA trade, the loss of output was not caused in any important way by the rapid move to free trade.

Exchange Rate Targets and Currency Bands

Abstract: Research programmes in economics usually emerge from the intersection between a new analytical approach and a real economic problem. In the last few years, such a programme has emerged in international monetary economics, which is underpinned by a theoretical framework grounded in stochastic calculus and the increasing prominence in the real world of the international monetary arrangements under which national monetary authorities attempt to keep exchange rates within bands or 'target zones'. This new programme of research also covers switches in exchange rate regimes. This volume from the Centre for economic Policy Research and the National Bureau of Economic Research includes contributions - as authors or discussants - from most of the active participants in the development of this new field, and will serve as a useful introduction and basic text for this new research programme. It opens with an account of the basic economic model of a currency band developed by Paul Krugman, which is followed by two papers that extend this approach. Other chapters study the regime switches entailed in Britain's return to the gold standard in 1925 and the preannounced entry of a floating currency into a band such as the EMS. Essays on sustainability and realignment consider the possible outcomes of speculative attacks on such bands, and the volume ends with a paper on econometric testing of models of this type.