expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

an empirical study on taiwan s current account 1961 90 in this paper a simple intertemporal current account model is developed for a small open economy with imperfect capital markets the model nests both perfect and imperfect international capital mobilities as its special cases the model is empirically examined using taiwan s annual data for the period between 1961 and 1990 our results show that the model is able to explain some historical movements of taiwan s trade balance however in contrast to many findings from previous studies for other countries the model is rejected one important feature of the rejection of the model is that the actual trade balance series is much more volatile than can be explained by the model this is especially so for the periods when world oil shocks occurred these results indicates that changes in the terms of trade which our simple model neglects might be important factors in taiwan s current determination

on the complementarity of commercial policy capital controls and inflation tax this paper studies the optimal use of distortive policies aimed at raising a given real revenue in a general equilibrium framework in which lump sum taxes are absent the policies analysed are an inflation tax commercial policy and an implicit tax on capital inflows it is shown that we would tend to avoid activating an inflation tax for small revenue needs if the policy target were allocative we would tend to use only one policy instrument thus each policy has its own comparative advantage and their combined use is justified when the target is raising government revenue

on savings and investment dynamics in a small open economy abstract this paper constructs a stochastic overlapping generations two country model of savings and investment under conditions of perfect international capital mobility the focus of the analysis is on the relationship between savings and investment dynamics in a small open economy in response to stochastic variations in domestic and or foreign production technologies the model is simulated under alternative specifications of the stochastic distribution governing both technologies this provides insight into the very complicated nature and rich diversity of possible relationships between savings and investment dynamics

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

cooperation among strangers with limited information about reputation abstract the amount of institutional intervention necessary to secure efficiency enhancing cooperation in markets and organizations in circumstances where interactions take place among essentially strangers depends critically on the amount of information informal reputation mechanisms need transmit models based on subgame perfection find that the information necessary to support cooperation is recursive in nature and thus information generating and processing requirements are quite demanding models that do not rely on subgame perfection on the other hand suggest that the information demands may be quite modest the experiment we present indicates that even without any reputation information there is a non negligible amount of cooperation that is however quite sensitive to the cooperation costs for high costs providing information about a partner s immediate past action increases cooperation recursive information about the partners previous partners reputation further promotes cooperation regardless of the cooperation costs

the role of exchange rate for current account a panel data analysis abstract the goal of this paper is to address the role of the real effective exchange rate fundamentals misalignment and volatility for the current account using a panel data analysis for a set of 58 countries over the period of 1994 2014 the results suggest that exchange rate misalignment is relevant for current account adjustment where countries with a more appreciated depreciated exchange rate face a worse better current account performance regarding the role of other control variables current account adjustment is affected by the savings rate where higher lower values are associated with better worse current account performance corroborating the lessons from the consumption smoothing approach there is also evidence of a positive effect for the lagged current account persistence effect for emerging and less developed countries there is evidence of a significant role played by monetary independence where more less monetary independence is associated with better worse current account performance

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

real exchange rates under alternative nominal exchange rate systems abstract the paper develops an equilibrium model of the determination of exchange rates the relative price of nontraded goods and the current account the focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange rate system is neutral with respect to real variables in the economy the model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates an econometric investigation of the raltion between the exchange rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

temporary and permanent government spending in an open economy some evidence for the united kingdom abstract this paper investigates the effects of government spending changes on a small open economy in an intertemporal substitution framework if agents internalize the government s budget constraint temporary and permanent spending have different implications for wealth and consequently different effects on output and the balance of trade estimation of these effects isolates the different channels through which government spending can influence economic activity main findings for the united kingdom are that government spending i crowds out private spending ii is directly productive and iii when rising permanently leads to a negative wealth effect which induces a large rise in work effort

dual exchange rate systems and capital controls an investigation abstract the welfare aspects of dual exchange rate systems are analyzed in this paper the requirement that domestic financial transactions with the rest of the world be undertaken at a special foreign exchange rate is found to be equivalent to levying a tariff on this class of international transactions hence a dual exchange rate system and capital controls are shown to be essentially identical in light of the above statements the dual exchange rate system should be regarded as a form of commercial policy and be evaluated in this context by applying the applicable standard real trade theorems

inside money and the open economy abstract this paper presents a theoretical model of a world economy with international capital mobility non substitutable national currencies and flexible exchange rates an essential feature of the model is that individuals face a non trivial choice between real assets intermediated through banks inside money and unbacked currency outside money real shocks affect the relative demand for inside as opposed to outside money the money multiplier and are transmitted internationally through capital markets thereby affecting money stocks price levels and output abroad the analysis provides a possible explanation for the pattern of comovements in money supplies inflation rates and output levels across countries

trade in nominal assets and net international capital flows abstract nominal assets play a major role in international financial markets while trade in indexed bonds is limited as a result agents are exposed to both price and exchange rate uncertainty nonetheless previous research on net capital flows has assumed the presence of a risk free vehicle to intertemporal asset trade in this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity we find that exposure to nominal risk dampens net capital flows thus making economies effectively more closed

tariffs interest rates and the trade balance in the world economy abstract a two commodity intertemporal framework is used to show that in contrast to the conventional wisdom both permanent and temporary tariffs may worsen the trade balance of a large country for a temporary tariff the key condition for this result is a low intertemporal elasticity of substitution in consumption when a temporary tariff worsens the trade balance the world real interest rate must fall if the tariff imposing country is running a deficit and rise if it is running a surplus temporary tariffs can only worsen the trade balance of a surplus country when international differences in tastes are important

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

a further exploration in the theory of exchange rate regimes in an interesting paper in this journal elhanan helpman 1981 develops a simple two country model to compare the welfare levels that are achieved under different exchange rate regimes in a world characterized by perfect foresight his basic finding is that equilibrium consumption allocations and hence welfare levels are identical under a floating exchange rate system and a one sided peg fixed exchange rate regime this result is due to helpman s assumption that output is determined exogenously which allows a separation of the real and monetary sides of the economy the purpose of this paper is to extend helpman s model by making two alterations in his setup 1 to allow production to be endogenously determined as a function of labor force participation and 2 to allow welfare levels to be dependent on labor service as well as on consumption the main conclusion then obtained is that a country may achieve a higher welfare level under a flexible exchange rate regime than under a fixed exchange rate regime since it is able to choose an optimal rate of inflation or currency depreciation

dual exchange rates capital controls and sticky prices abstract it is often argued that capital controls are an appropriate policy response to the exchange rate overshooting which occurs when asset markets adjust more rapidly than goods markets in this paper an intertemporal disequilibrium model of an open economy is developed in which the effect of capital controls is examined the results are contrasted with recent studies by adams and greenwood 1985 and obstfeld 1986 in which capital controls are evaluated within a purely equilibrium framework and thus inevitably take the form of a welfare reducing distortion

testing an optimizing model of the current account via the consumption function abstract as the intertemporal allocation of consumption lies at the heart of the optimizing approach to current account determination we assess the validity of this new view by testing an open economy consumption function this method avoids some interpretation difficulties in previous studies for the four countries examined we generally could not reject the overidentifying restrictions imposed by the specification of our model an extended version of the model does not find any clear evidence of substitution between private and public consumption all our results are robust to two different measures of the external asset stock

real transfers in fixed exchange rate systems and the international adjustment mechanism abstract fixed exchange rates can be maintained by different types of stabilization schemes this paper takes a look at some alternative institutional settings and shows that there is an inherent redistribution mechanism in some of them that will influence the world allocation of consumption an examination of the global adjustment to monetary disturbances illustrates some interesting implications of the institutional differences between alternative systems the results suggest that the description of the international adjustment mechanism under fixed exchange rates given by the monetary approach to the balance of payments is valid only under quite restrictive assumptions

who supports the ecb evidence from eurobarometer survey data this paper contributes empirically to the long debated issue of the legitimacy of the european central bank ecb with regard to european polities using micro level data from the eurobarometer survey we shed light on the socio demographic determinants of public opinion support for the ecb we find that people with higher level of education and income and centre to right wing political orientation tend to support the ecb as well as people with optimistic expectations on the economic situation by contrast the unemployed tend to distrust the ecb the policy relevance of such results is important for ecb s communication strategy with the general public

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account