Showing papers on "Foreign-exchange reserves published in 1979"

Exchange Market Pressure in Postwar Brazil: An Application of the Girton-Roper Monetary Model

Abstract: This study applies Lance Girton and Don Roper's (hereafter G-R) monetary model of exchange market pressure to the postwar Brazilian monetary experience. The model was designed specifically for the Canadian managed float during the period 1952-62. The object of their model is to explain what they term "exchange market pressure"; that is, the pressure on foreign exchange reserves and the exchange rate when there exists an excess of domestic money supply over money demand in a managed floating exchange rate regime. The basic theoretical proposition is that any such excess supply of money can be relieved by an exchange depreciation, a loss in foreign reserves, or, in the context of a managed float, by some combination of the two. In this sense, the G-R managed float model used here is firmly rooted in the modern monetary approach to exchange rates and the balance of payments.' Brazil provides a particularly good example for testing this approach, not only because it is in many senses a unique example of a postwar managed float system, but also because it can be treated as a "small, open" economy in the sense that world prices and monetary conditions faced by Brazil are taken as given. This particularly suits the purpose of most modern monetary models which make this assumption and obviates the problems of monetary dependence and neutralization dealt with in the pioneering G-R paper. Specifically, the small-country assumption permits us to devise a simple one-country equation of managed floating which depends upon four essential ingredients: 1) money demand, 2) money supply, 3) purchasing power parity, and 4) monetary equilibrium.2 Furthermore, in Brazil a much greater proportion of exchange market pressure was absorbed by exchange rate depreciation than in the Canadian case where changes in reserves were large relative to exchange rate movements. In short, postwar Brazil provides a singularly good opportunity to test the monetary model of exchange market pressure. Section I briefly states the essential elements of the monetary model, and derives the equation to be tested for the Brazilian experience from 1955 to 1975. Section II reports empirical results for the exchange market pressure model, and Section III examines the applicability of the relative version of purchasing power parity for the time period considered. Section IV summarizes the results and discusses the merits of the monetary approach in light of the Brazilian experience.

The global framework

Abstract: This paper describes the main features of the global model system used in preparing the World Bank's World Development Report, 1979. The system provides a quantitative basis for the study of growth prospects in developing countries in the context of the world economy, and has been used to make projections for the period 1975-90. It is not a finished product, but part of a continuing effort to improve the Bank's analytical methods. At present it consists of three main modules linked via recursive iteration: (i) models of economic activity in eleven developing regions, together with sets of projections for industrialized countries, capital surplus oil exporting countries and centrally planned economies; (ii) a module describing international trade flows and commodity prices; and (iii) a module describing the global supply of various types of capital and their allocation among regions. The models for developing regions are dynamic optimizing models in the tradition of economy-wide planning models. Aggregate output of the region in question is maximized subject to constraints imposed by technology, behavior, domestic policy choices and the international economic environment.

The Dollar As A Reserve Currency

Abstract: T HE dollar has passed through three main phases since the Second World War. The United States emerged from the War as the major world power, with the dominant economy and also, though not so obviously, the dominant currency. Alastair Cooke recalled in a recent ' Letter from America ' a speech made by Ramsay MacDonald to a conference in London in 1934, which contained a plea to all the Europeans to give up trying to maintain their own currencies as independent units and to link them instead either to sterling or to the dollar. Within ten years they were no longer alternatives. During the War Britain built up debts in the form of sterling balances-which are still with us, and in about the same amount, because we have been unable to pay them off; but the United States by contrast, and unusually after a major war, emerged with its economy actually enhanced. It had increased the efficiency and the pre-eminence of its industry-so much so that only now, after about thirty years of peaceful competition, is the significance of its relatively low rate of productivity growth (a fundamental criterion) becoming apparent. Also at the end of the Second World War the United States had about 60 per cent of the world's reserves, with a very strong liquid position: its reserves greatly exceeded by any measure its liabilities. However, in the late 1940s only 6 per cent of the world's reserves were held in dollars, while the percentage in sterling was much larger. In fact, the first phase, which began then, was seen as one of dollar shortage. (As this article will repeatedly show, statistics do not always clearly demonstrate the underlying facts, or the psychology, of the time.) The supremacy of the dollar was also veiled by the expression ' gold exchange system ', which was adopted to describe the Bretton Woods system. In fact the United States played the major part in designing that system, and but for the authority of Keynes probably no other country would have had a sizable voice in it. The United States expected that, because its economy would be strong, other countries would more often than not be wanting to devalue; so it chose a fixed-rate system which would limit devaluations against the dollar, and it had a very high quota in the new International Monetary Fund (IMF)-at one point over 30 per cent. In the event, the system that the United States devised did not work very

The Monetary Approach to Official Reserves and the Foreign Exchange Rate in France, 1962-74: Some Structural Estimates

Abstract: Any test of the monetary approach centered on the period of fixed exchange rates would now be predominantly of historical interest. At the time of this study, however, experience with flexible exchangc rates was still too short to permit concentr.ating econometric analysis exclusively on this more recent system. Caught in this net, we have attempted an analysis of official reserves and the foreign exchange rate in lIr;unce covering both fixed and flexible exchange rates, that is, thirty-nine quarters of tixed rates, 1962.11971.3, and thirteen quartcrs of flexible rates, 1971.4-1974.4. The cost is the presence of errors in our simultaneous equation estimates of the exchange rate during the period of fixed rates. But the benefit is an econometric analysis founded on fifty-two observations, and yet covering three years of flexible rates. Since the errors in the estimates of the exchange rate under fixed rates are quite moderate, the cost would seem to be worth the benefit. The most important characteristic of our work is the use of a detailed structural model of bank credit and money in testing the monetary approach. The early tests of this approach simplified the structure of the monetary system to the utmost and considered the domestic source component of the reserve base (or the total base minus official foreign reserves) and the money multiplier as exogenous.' But there is really no logical basis for these restrictive assumptions. The monetary approach states that the demand and supply of money in a "small" country together determine 1) money, and 2) official reserves or the foreign exchange rate or the attainable combinations of the two, depending upon fixed, floating, or managed exchange rates. Nothing but a correct specification of the conditions for monetary equilibrium can provide a basis for testing this proposition. We also deviate from the tendency in the literature on the monetary approach to suppose that any convenient measure of money will do. Based on this attitude, there have been many tests of the monetary approach using simply the reserve base as the measure of money, even though this aggregate, consisting of currency plus an arbitrary fraction of deposits, is inappropriate in analyzing the monetary behavior of firms and households.2 In justifying this measure in a well-known econometric work, Pentti Kouri and Michael Porter nmerely say: "The essential features of the model [would not be] substantially changed by incorporating a more complete banking system" (p. 448). But not only does this fail to meet the criticism, it also neglects the fact that the monetary approach can give rise to conflicting estimates of changes in official reserves and the exchange rate depending on the money measure.3 There is no way of assessing the seriousness of this last objection without testing. In this work we shall examine the extent to which varying and tenable money measures in France yield convergent results. In spite of these deviations from the literature, we may be said to adhere to a strict

The needs for international monetary reserves, exchange rate flexibility, and joining a currency area

Abstract: The needs for reserves, exchange rate flexibility and monetary policy are derived, the need being the result of an optimization problem. The level of domestic production, its variance and that of the domestic price level have been chosen as criteria of the benefits and costs. The effectiveness and costs of balance of payments adjustment, which appear to be co-determinants of the needs, are expressed in the parameters of an economic model. This shows that the need for reserves displays a one-to-one relation to quantities of the demand for money and to the balance of payments disturbance. Only the latter is a meaningful criterion for joining a currency area.

Budgetdefizit und Leistungsbilanzsaldo-Replik

Abstract: In a previous article I explained the gradual deterioration of Austria's current balance in the seventies and its pronounced deficit in 1976 and 1977 within the framework of the relative absorption approach by reference to capacity utilization rates that were high compared to those of other countries. The high utilization rates in turn were the consequence of an expansive economic policy, in particular of an expansive fiscal policy. Guger-Worgotter, on the other hand, interpret the deficit in the Austrian current balance as the result of weak foreign demand and view the budget deficit as an attempt to compensate for insufficient aggregate demand; they conclude that full employment policies should be continued disregarding the economic development abroad. The present paper presents additional evidence that the deficit in the current balance is attributable to the fact that Austria's economic policy maintained a higher rate of capacity utilization than abroad. Such a policy serves a useful purpose and can be financed by foreign currency reserves only in the case of a cyclical demand deficiency; in the long run, however, it can be sustained at best only under a regime of flexible exchange rates (continuing devaluation).