Showing papers on "Foreign exchange market published in 1978"
TL;DR: In this paper, the problem of optimal exchange intervention is approached using the techniques derived in the "targets, instruments, and indicators" literature, and the optimal exchange 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.
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.
185 citations
TL;DR: The choice of an appropriate exchange rate system for a country is of great importance to a country as it will have important implications for the conduct of its domestic and international economic policy as mentioned in this paper.
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
125 citations
TL;DR: This paper investigated the behavior of foreign exchange rates and found that the distribution of the underlying stochastic process for foreign exchange rate changes was stable paretion during fixed rate periods while a Student model provided a relatively better description of floating rates.
Abstract: This paper investigates the behavior of foreign exchange rates. Empirical tests indicate that the distribution of the underlying stochastic process for foreign exchange rate changes was stable paretion during fixed rate periods while a Student model provides a relatively better description of floating rates. These findings point to an important direction for further work on the appropriate distribution for foreign exchange rates and estimates of parameters.
104 citations
TL;DR: In this article, the authors have attempted to determine the extent to which the foreign exchange market exhibits the adverse features noted above, and they conclude that by and large foreign exchange markets have not performed particularly poorly.
60 citations
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TL;DR: In this article, the authors examined three measures of expectations derived from observed data from the market for foreign exchange and used them to estimate the demand for money during the early 1920's 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
56 citations
TL;DR: In this paper, the authors tried to explain the variation in the bid-ask spread over time and across currencies by examining the costs and risks banks face when dealing in foreign exchange and defined the proper risk measure for open forward position.
Abstract: The bid-ask spread on forward contracts determines, in part, the effectiveness of the foreign exchange market as a vehicle for hedging exchange risk. The purpose of this paper is to try to explain the variation in the spread over time and across currencies by examining the costs and risks banks face when dealing in foreign exchange. The paper also attempts to define the proper risk measure for open forward position in foreign exchange.
27 citations
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TL;DR: In this article, a simple model of exchange rate determination is proposed and the authors examine the issue of informational efficiency in the context of the foreign exchange market by setting up an exchange rate model and using the equilibrium properties of the model to examine market efficiency.
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.
25 citations
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TL;DR: In this paper, the authors re-examine the evidence from the perspective of the recently revived monetary approach (or more generally, asset-market approach) to the exchange rate and show that the results are consistent with the efficient market hypothesis.
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.
25 citations
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11 May 1978
TL;DR: The economic crisis of 1965/6 and the gamble taken: the nature of the financial crisis' the mixed performance of production the historical legacy' the gamble on instant price stabilisation and postponed rehabilitation the First Five Year Plan, 1969 to 1974 (Repelita 1) conclusion as discussed by the authors.
Abstract: The economic crisis of 1965/6 and the gamble taken: the nature of the financial crisis' the mixed performance of production the historical legacy' the gamble on instant price stabilisation and postponed rehabilitation the First Five Year Plan, 1969 to 1974 (Repelita 1) conclusion. Stabilisation and its maintenance: the politics of aid the emergence of the Inter-Governmental Group on Indonesia the quantity of aid new economic management liberalisation of the foreign exchange market foreign aid and the balance of payments foreign aid and the budgets credit and the rise of domestic savings evaluation of the financial management. Rehabilitation and expansion of the endogenous economy: rehabilitation of traditional exports advancing the principal food crops sector industrial rehabilitation mining rehabilitation conclusion. New investment and exogenous growth: the foreign and domestic investment laws trends of foreign investment by country investment by sector and by province job creation by new investment approvals timber estate rehabilitation non-oil mining secondary industry conclusion. The oil sector: pre-1965 developments post-1965 expansion difficulties in controlling Portamina implication of the oil price increases. Disenchantment and partial rectification: the prolonged liquidity crisis in domestic industry stagnant traditional agriculture small-scale versus large-scale disenchantment with foreign investment new foreign investment regulations the special case of Japanese investment corruption the Chinese-pribumi (indigenous Indonesian issue) development of a capital market conclusion. Conclusion: successes and contradictions of the crisis strategy rural livelihoods in Java problems of the Second Five Year Plant (Repelita II).
23 citations
TL;DR: In this article, a revised series of nineteenth-century Anglo-American foreign exchange rates is presented, 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.
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.
23 citations
TL;DR: In this paper, the effect of the capital gains or losses from a change in the exchange rate has been considered in the context of small-country exchange rate analysis, and it is shown that 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.
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
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TL;DR: The authors empirically investigated currency futures traded on the International Monetary Market (IMM) of the Chicago Mercantile Exchange (CME) and found that currency future prices were consonant with the interest rate parity theorem.
Abstract: This paper empirically investigates three questions concerning currency futures traded on the International Monetary Market (IMM) of the Chicago Mercantile Exchange: 1) Are currency future prices consonant with the interest rate parity theorem? 2) Does a characteristic bias exist in the currency futures prices? 3) What has been the holding period return experience of currency futures since their inception on the IMM?
TL;DR: In this article, the authors present a technique for optimal hedging decisions for a general set of international financial problems, specifically within the context of a floating exchange rate regime, which requires neither exchange rate projections nor the specification of a utility function for the decision-maker.
Abstract: This article presents a technique for optimal hedging decisions for a general set of international financial problems, specifically within the context of a floating exchange rate regime. The techniques discussed are designed specifically to require neither exchange rate projections nor the specification of a utility function for the decision-maker. Rather, the decision-maker is encouraged to analyze the implications of a given financial strategy over a reasonable range of future exchange rates, choosing the strategy that best meets corporate financial goals in light of possible (and uncertain) exchange rate fluctuations.
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TL;DR: In this article, an equilibrium model of the determination of exchange rates and prices of goods is developed, based on the assumption that price changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by the government to affect the conditions of trade by foreign exchange market operations.
Abstract: This paper develops an equilibrium model of the determination of exchange rates and prices of goods. Changes in relative prices of goods, due to supply or demand shifts, induce changes in exchange rates and deviations from purchasing power parity. These changes may create a correlation between the exchange rate and the terms of trade, but this correlation cannot be exploited by the government to affect the terms of trade by foreign exchange market operations.
TL;DR: The OPTICA (Optimal Currency Area) Group which was appointed by the European Commission tried to work out appropriate rules for the EC as discussed by the authors, which may not lead to realistic and stable exchange rates.
Abstract: Leaving foreign exchange markets to themselves may not lead to realistic and stable exchange rates. Thus appropriate criteria for interference must be defined. The OPTICA (Optimal Currency Area) Group which was appointed by the European Commission tried to work out appropriate rules for the EC. Dr Scharrer, member of the group, explains their proposal; Professor Cohen and EC Vice President Ortoli give their comments.
01 Jan 1978
TL;DR: In this paper, the exchange rate between the mark price of the U.S. dollar and the German mark price has fluctuated sharply, even though the two countries' respective price levels have increased at almost the same rate.
Abstract: Changes in exchange rates are uncertain events. Most changes in exchange rates are associated with differential movements in national price levels — the price levels in the countries whose currencies are devalued or depreciate have risen more rapidly than the U.S. price level and, to a lesser extent, the countries whose currencies were revalued or appreciated have had less rapid inflation. Even then, the timing of such changes cannot be foretold with accuracy. Moreover, not all changes in exchange rates, especially on a month-to-month or quarter-to-quarter basis, reflect changes in relative prices. Since most industrial countries ceased pegging their currencies in early 1973, the exchange rate between the mark price of the U.S. dollar has fluctuated sharply, even though the U.S. and German price levels have increased at almost the same rate.
TL;DR: The most dramatic increases in the foreign exchange value of the US dollar over 1975-76 were against the British pound and the Italian lira as discussed by the authors, and the value of US dollar rose by about 30 percent and 26 percent, respectively.
Abstract: nomic slowdown of 1973-75, the foreign exchange value of the dollar rose substantially, increasing by about 8 percent on a trade-weighted basis.’ The dollar declined slightly only against the currencies of Canada and Switzerland. The most dramatic increases in the foreign exchange value of the dollar over 1975-76 were against the British pound and the Italian lira. In terms of the British pound, the value of the dollar rose by about 30 percent, and against the Italian lira the dollar rose by about 26 percent.