Showing papers on "Foreign-exchange reserves published in 1986"

Monetary Transmission: Through Bank Loans or Bank Liabilities?

Abstract: INTEREST IN THE TRANSMISSION OF MONETARY fluctuations to real output has dominated macroeconomics since at least the eighteenth century. Since then, many observers have noted the tendency of a monetary expansion to be followed initially by an expansion of real output, and later by an increase in prices. While the reason for the long-run price change is well understood, understanding the short-run impact of money on nominal output remains an active, unresolved, research topic. Most theoretical models explain the transmission of monetary fluctuations to real output as a consequence of sticky prices or expectations. The stickiness is either due to informational imperfections or to contractual rigidities. While the policy implications of the two types of stickiness differ, both types of model predict a transitory response of real output to a shock in nominal money balances. Neither the informational imperfection nor the contractual rigidity story is completely compelling, and both rely on the central role played by movements in real balances and perceived real interest rates. Yet, for thirty-five years following World War II, neither significant movements in the anticipated real rate nor large interest elasticities of spending were apparent. Despite this, the empirical correlation of money and output fluctuations has been found in most time periods and countries. Consequently, the need for alternative explanations of monetary transmission (or a credible "reverse causation" story) remains strong.

Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments

Abstract: Balance-of-payments models of speculative attack differ from non-renewable resource models in that foreign exchange reserves may be borrowed from abroad. This paper shows that in an idealized world where all private income is subject to lump-sum taxation, central-bank reserves can become infinitely negative without violating the government's intertemporal budget constraint. None the less, a growth rate of domestic credit exceeding the world interest rate, if maintained indefinitely, leads to violation of the constraint in the paper's model. Given an assumed limit to official external borrowing, the paper next analyses inevitable transitions between fixed and floating exchange-rate regimes when individual preferences are explicitly specified. In a discrete-time deterministic model the collapse of a fixed rate may be characterized by two successive speculative attacks.

The Demand for Currency in the United States

Abstract: The idea of totally deregulating the financial system and implementing monetary policy through currency control has received renewed attention. An important aspect concerning the desirability of using currency as the instrument of policy is the behavior of the demand for currency. If currency demand is not well behaved, then a policy of controlling the nominal supply of currency could produce drastic swings in the price level and interest rates. The adverse consequence of such effects could outweigh the benefits of deregulation. It is therefore crucial that the behavior of currency demand be well understood before unequivocally advocating total financial deregulation and currency control. This paper takes a step in that direction by analyzing the demand for currency over the period 1921-1980.

Generating a Sharp Disinflation: Israel 1985

Abstract: On July 1 the Israeli government adopted a comprehensive emergency program for stabilization and recovery which has had dramatic consequences, at least in the very short-run. Within a few months inflation was down to 1-2 percent a month, foreign exchange reserves were rising rapidly andin spite of rather harsh contractionary fiscal and monetary policy measures average unemployment did not rise by more than 2 percentage points abovethe pre-July level.This paper deals with the background to the acute crisis of the Israeli economy and the conceptual underpinnings of the stabilization plan and with the first six months of its implementation. Apart from the more conventional fiscal and monetary policy measures, with partial deindexation, special emphasis is put on stabilization of the exchange rate, as a central nominal anchor for the price system, along with a wage policy package. Further budget restraint as well as wage moderation are considered the key for continued success of the stabilization effort. Both of these conditions will be tested in the new fiscal year starting April 1986.

Singapore: Resources and Growth

Abstract: Singapore is one the fastest growing economies in the world. Its outstanding performance is reflected not only in its per capita income growth, but also in terms of the reduction of its unemployment rate, the clearance of urban slums, the investment in social and economic infrastructure, the strength of its currency, and the accumulation of foreign reserves. This text identifies the sources of such growth.

Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks

Abstract: The paper extends the recent literature on the collapse of managed exchange-rate regimes by allowing explicitly for the government budget constraint and the interest cost of servicing the public debt. The policy experiment analysed in this paper is the decision by a government to replenish its stock of foreign exchange reserves through a once-off open market sale of bonds. Without a fundamental fiscal correction (i.e. a decision to reduce the primary (non-interest) deficit by an amount equal to the increase in the interest cost of servicing the debt) the consequences of this policy are as follows: in a deterministic model, the timing of the speculative attack is brought forward (delayed) if the borrowing takes place long before (close to) the date at which without borrowing the collapse would have occurred. The magnitude of the attack (the final loss of reserves) always increases because of borrowing. In a stochastic model, borrowing reduces the probability of an early collapse and increases the likelihood of a later collapse. Under mild conditions, the expected length of the time interval until the collapse occurs is increased by borrowing.

The contribution of foreign direct investment to exports: An empirical study of 23 LDCs

Abstract: Insufficient capital and foreign exchange have often been portrayed as key constraints to the growth and development of less developed countries. These economies have thus come to rely on foreign direct investment as a means of increasing their capital base and foreign exchange reserves and, via the operation of foreign subsidiary firms, as a strategy for increasing the production not only of locally consumed commodities but also of exports. This article focuses on the latter aspect.

West African monetary unification : the case for a common currency.

Abstract: In recent years, scholarly attention on the complementary role of monetary integration to further economic integration in developing countries has tended to emphasise the direct and indirect benefits of 'limited monetary integration' while neglecting considerations of those benefits likely to accrue from adopting a common currency or fixed rates of exchange between their national currencies. However, the decision by the Heads of State and Government of the 16 members of the Economic Community of West African States (ECOWAS) in May 1983 requesting a study of proposals leading to the creation of a single ECOWAS monetary zone has given a new scope and dimension of interest in the economics of common currencies. The West African countries in their efforts to integrate and achieve higher growth and development are increasingly frustrated by a number of internal and external factors including their dependent, disintegrated and inefficient patterns of domestic production, trade and currency systems, in particular, the continuing weakness and increasing precariousness of their national currencies, and a succession of global monetary and financial crises. These constraints, together with the payments and adjustment problems they have occasioned, and the relative unsuccessful experiences in currency management, payments and exchange restrictions within the West African Clearing House (WACH) and the exclusively francophone West African Monetary Union (WAMU or UMOA), have created a need for extending and deepening the scope for monetary and economic cooperation in the region. The Study advocates principally an all-embracing monetary union by means of a common currency as a strategic catalyst and timely element of realism that would create an impulse for national development and regional economic integration. Using basic propositions concerning aspects of monetary integration, stressing in particular the foundations of optimum currency areas, the Study tries to present a comprehensive and analytic discussion of the feasibility, processes, beneficial effects and constraints involved in achieving currency unification in the broader setting of West Africa's disparate economic and socio-political developments.

Fiscal Prerequisites for a Viable Managed Exchange Rate Regime: A Non-technical Eclectic Introduction

Abstract: The paper first reviews the budget identities of the fiscal and monetary authorities and the solvency constraint or present value budget-constraint of the consolidated public sector, for closed and open economies. It then discusses the new conventional wisdom concerning the fiscal roots of inflation and the budgetary prerequisites for generating and stopping hyperinflation. The popular rational expectations "Unpleasant Monetarist Arithmetic" model of Sargent and Wallace has ambiguous inflation implications from an increase in the fundamental deficit and is incapable of generating hyperinflation. The only runaway, explosive or unstable behavior it can exhibit is "hyperdeflation"! In the open economy, the need to maintain a managed exchange rate regime does not impose any constraint on the growth rate of domestic credit, arising through the government's need to remain solvent. Obstfeld's proposition to the contrary is due to the omission of government bonds and borrowing. There is not yet any "deep structural" theory justifying the (exogenous) lower bounds on the stock of foreign exchange reserves characteristic of the collapsing exchange rate literature. Absent such a theory of "international liquidity," one cannot model satisfactorily a foreign exchange crisis that is not at the same time a government solvency crisis. Given such a lower bound, the existence or absence of a pecuniary opportunity cost to holding reserves is shown to condition the fiscal and financial actions consistent with prolonged survival of the managed exchange rate regime.

Financial reforms and balance-of-payments crisis: the case of the Philippines: 1980-83

Abstract: In the Philippines, financial reforms began in earnest in July 1981 with the deregulation of bank interest rates. But within two years; a crisis in the balance-of-payments intervened. This paper addresses two major issues. First, to what extent did the financial reforms contribute to the balance-of-payments crisis? The findings indicate that while the reforms do seem to have made it more difficult to finance the budget deficits in 1981 and 1982, they did so only in a minor way. Given the enormity of the budget deficits and the rate at which foreign exchange reserves were depleted, it does not look as if the balance-of-payments crisis would have been prevented had the reforms not been introduced. The second issue is: To what extent did the reforms weaken the financial sector's ability to weather the external crisis? The findings show that the sudden increase in deposit rates in 1981 and 1982 while the interest rates on outstanding loans remained the same hurt many banks. Even the increase in the interest rate on new loans contracted in 1984 was not enough to compensate for the interest rate loss incurred on medium- and long-term loans contracted in the previous years, Indeed, this has severely weakened the banking system’s ability to weather the balance-of-payments crisis.

Rediscount Policy and Official Capital Flows: A Study of Monetary Control in Central America in the 1950s

Abstract: A WIDE RANGE OF EMPIRICAL STUDIES HAVE RECENTLY questioned the ability of monetary authorities to exercise monetary control in the sense that they cannot divorce their foreign exchange market intervention operations from their control of domestic money supplies. ' This paper will analyze the policy implications of this large literature on monetary control in the context of institutional constraints typically found in developing countries. In particular, it will investigate the balance of payments implications of central bank financing of major export crops. It will show that, in Costa Rica, E1 Salvador, and Nicaragua in the 1950s, the central banks' rediscounting of seasonal agricultural paper caused correspondingly seasonal foreign exchange reserve movements; the central banks' policy of liberally extending seasonal agricultural credit, in the environment where they had little monetary control, meant that official capital flows substituted for private capital flows. The predominant tool of monetary policy in most developing countries takes the form of rediscount of notes and securities, owing to the absence of well-developed financial institutions.2 Additionally, such rediscounting is often done in connection

Generating a Sharp Disinflation: Israel 1985

Abstract: On July 1 the Israeli government adopted a comprehensive emergency program for stabilization and recovery which has had dramatic consequences, at least in the very short-run. Within a few months inflation was down to 1-2 percent a month, foreign exchange reserves were rising rapidly andin spite of rather harsh contractionary fiscal and monetary policy measures average unemployment did not rise by more than 2 percentage points abovethe pre-July level.This paper deals with the background to the acute crisis of the Israeli economy and the conceptual underpinnings of the stabilization plan and with the first six months of its implementation. Apart from the more conventional fiscal and monetary policy measures, with partial deindexation, special emphasis is put on stabilization of the exchange rate, as a central nominal anchor for the price system, along with a wage policy package. Further budget restraint as well as wage moderation are considered the key for continued success of the stabilization effort. Both of these conditions will be tested in the new fiscal year starting April 1986.

Growth and adjustment in an African monetary union : the CFA franc zone

Abstract: Thirteen African countries are engaged in a monetary union with France known as the CFA Zone. Participation in the Zone sets its members apart from most other developing countries in three ways: (a) monetary integration through the pooling of reserves; (b) currency convertibility; and (c) a fixed exchange rate with the French franc. Though it is generally agreed that membership in the Zone has been beneficial, concern has recently been raised that adjustments to macroeconomic imbalances have not been as prompt and complete as desirable. This paper addresses those concerns. The paper starts with a brief review of the attributes that make belonging to a monetary union desirable. The paper proceeds to a statistical comparison of GNP growth rates of CFA countries with a group of comparable developing countries over the period 1960-82. To isolate the monetary union effect, pairwise growth comparisons are submitted to statistical tests for eleven country classifications in an error component framework, i.e., one which accounts for missing variables. The third part of the paper presents a stylized two-sector model inspired by the adjustment experience of the three largest countries in the Zone.

Fiscal Prerequisites for a Viable Managed Exchange Rate Regime: A Non-technical Eclectic Introduction

Abstract: The paper first reviews the budget identities of the fiscal and monetary authorities and the solvency constraint or present value budget-constraint of the consolidated public sector, for closed and open economies. It then discusses the new conventional wisdom concerning the fiscal roots of inflation and the budgetary prerequisites for generating and stopping hyperinflation. The popular rational expectations "Unpleasant Monetarist Arithmetic" model of Sargent and Wallace has ambiguous inflation implications from an increase in the fundamental deficit and is incapable of generating hyperinflation. The only runaway, explosive or unstable behavior it can exhibit is "hyperdeflation"! In the open economy, the need to maintain a managed exchange rate regime does not impose any constraint on the growth rate of domestic credit, arising through the government's need to remain solvent. Obstfeld's proposition to the contrary is due to the omission of government bonds and borrowing. There is not yet any "deep structural" theory justifying the (exogenous) lower bounds on the stock of foreign exchange reserves characteristic of the collapsing exchange rate literature. Absent such a theory of "international liquidity," one cannot model satisfactorily a foreign exchange crisis that is not at the same time a government solvency crisis. Given such a lower bound, the existence or absence of a pecuniary opportunity cost to holding reserves is shown to condition the fiscal and financial actions consistent with prolonged survival of the managed exchange rate regime.

Des conséquences conjoncturelles de la régulation monétaire

Abstract: The choice of the intermediate target in an overdraft economy In recent years, monetary authorities in implementing their policies have selected different monetary or financial aggregates for targetting. This paper studies the consequences of the choice of different financial aggregates as intermediate targets in an overdraf economy : (1) the money stock and the domestic financial assets, (2) their connterpart including financing of the government delit (the domestic counterpart of the central money stock, of the money stock and total domestic assets), (3) their counterpart without incliiding government debts (refinancing of banks by the Central Bank, banks' credit and private domestic borrowing). Only simples rides are considered like : the monetary authorities increase the interest rate iclien the demand for the aggregate increases. The paper pays a special attention to the link between the choice of the financial aggregate and the ability of the corresponding interest rate rule to stabilize output and foreign exchange reserves when the economy faces different shocks on demand, income, domestic and foreign assets demands. Section I links our analysis to Poole's seminal article and to the vocabulary introduced by B. Friedman. A simple model of an overdraft economy with fixed exchanged rates and imperfect capital mobility is presented in Section II. It allates us to compare the elasticity of the financial aggregates towards the interest rate and to appraise the sabilizing properties of the interest rate rules according to the intermediate target and he kind of the shock. Then we compare ex post transmission on output and reserves when the financial targets are reached, to the optimal policy and to the passive policy (no reaction). This gives some highlights on the choice of the aggregate and on the danger of targetting. The paper shows that the control of the money stock or the control of the total amount of domestic financial assets are very often destabilizing or perverse for output and reserves (leaning with the wind). Monetary authorities should always better control the domestic loans of the financial sector (e.g. the domestic eounter­part of the money stock instead of the numey stock, total domestic credit instead for domestic financial assets). Theij Should better choose the counterparts exchlding the government debt as monetary targets, if they can control public expenditures and their financing. However, for each aggregate, it can be found shocks which induce the monetary policy to react in a perverse or destabilizing way.