the real exchange rate conundrum the case of central america abstract this paper evaluates alternative measures of the real exchange rate for mexico and central american countries bilateral and multilateral real exchange rates using the consumer price index wholesale price index and gross domestic product deflator are calculated there are often significant differences between the bilateral and multilateral measures of the real exchange rate real exchange rates based on consumer price indexes and gross domestic product deflators were found to be more closely related to each other than either one was to the wholesale price index

exchange rate systems and investor preferences i introduction dissatisfaction with the performance in the 1980s of floating exchange rates has lead to renewed interest in a system of target zones for foreign exchange rates or a partial return to fixed exchange rates consideration of these proposals raises many of the same questions about the economic effects of fixed vs flexible exchange rates that were addressed in the late 1960s and early 1970s although there are several issues of interest both at the macroeconomic level and at the level of the individual investor in this paper we focus on only one do floating exchange rates increase the riskiness of international investment positions so that investors would prefer the distribution of returns existing under a fixed exchange rate regime this question whether international financial transactions are more risky under floating than under fixed rates was a major point of controversy in the debate over the adoption of floating exchange rates for a review of the arguments see for example friedman 1953 or halm 1970 once again this issue has arisen mckinnon 1988 86 argues i hypothesize that a floating exchange market is socially inefficient because private foreign exchange traders face a huge gap in relevant information the relative future purchasing powers of national fiat monies none of which has any intrinsic value are highly uncertain thus the assessments of international investors of whether dollar or yen or mark assets provide the best combination of yield and safety are unnecessarily volatile we might suppose then that this excess volatility will reduce international investment activity relative to what a fixed rate regime would encourage mckinnon is by no means alone in the belief that floating exchange rates add an undesirable level of risk to international investment positions see edison and melvin 1990 for a review of this literature however there has been little empirical work done on whether the move to floating rates did in fact add an undesirable level of risk our study is intended to shed light on this issue specifically we ask which group of risk averse investors prefers the distribution of returns under a fixed exchange rate regime and which prefers the distribution of returns under a floating exchange rate regime we begin by using a stochastic dominance approach to investigate exchange rate risk for twelve countries from the viewpoint of an investor holding currencies both u s and non u s investors are considered and we explore the risk taking characteristics of those investors who would prefer one regime to another we find that the fixed rate regime should be overwhelmingly preferred by all risk averse investors holding currencies next we consider the uncovered returns on foreign stocks again we consider both the u s and non u s investor we find that the floating rate regime should be preferred by all risk averse investors this finding for uncovered stock portfolios indicates that floating rates have not created a level of risk that investors consider excessive before proceeding we should address the problem of comparing two alternative exchange rate systems over two different time periods the greater variability of flexible exchange rates in the 1970s and 1980s compared to the earlier pegged rates is not entirely attributable to the change in the nominal exchange rate regime the 1970s and 1980s were characterized by more frequent and more serious real shocks to the global economy than was true of the 1950s and 1960s because of this difference we cannot assert based on a retrospective view of real returns to investors under alternative exchange rate systems that investors would generally prefer one exchange rate regime to another

affirmative action and opportunity a study of female quit rates t he effectiveness of affirmative action efforts has been a topic of some controversy and the literature is unclear about whether women and or minorities benefit one source of confusion is that in some models the economywide effect can be in a different direction than the effect upon regulated or covered individuals and firms in a sense this is much like the minimum wage in that while some individuals benefit there is considerable controversy about the gains for target groups as a whole what is more surprising however is that the affirmative action literature is unclear about whether the programs achieve their goals for firms which are covered again in part this confusion is theoretical for wage and hiring directives may provide conflicting incentives beller 1978 another difficulty is methodological in that measures of affirmative action activity tend to be indirect 1 this last point as we shall see is especially true for studies of the federal contract compliance program this paper assesses the effectiveness of the federal contract compliance program which is administered by the office of federal contract compliance ofcc in improving opportunities for women rather than focusing on wage growth or the sex composition of occupations or firms as have all the previous studies we examine quit rates quits are a useful measure of people s perceptions about their opportunities and effective affirmative action programs may improve intra firm opportunities for advancement as a result subject to some caveats discussed below we expect that program effectiveness is captured by a reduction in quit rates from previous levels in addition this paper employs a more defensible measure of ofcc activities than is typical in most studies part i of the paper develops the model part ii introduces the data and the specifications the basic results are presented in part iii two major conometric difficulties whether the ofcc variables are actually proxies for other industry effects and the possible endogeneity of ofcc activity are addressed in part iv and the results are summarized in the final section

estimating var models under non stationarity and cointegration alternative approaches for forecasting cattle prices multivariate var models estimated with non stationary data raise difficult econometric questions because differencing to achieve stationary can introduced distortions into multivariate models three approaches have been suggested for estimating such models 1 vector error correction vec models difference the data to achieve stationary and use an error correction term to replace the long run information lost through differencing 2 var models can be estimated with raw data in levels if the non stationary data is also cointegrated because recent theoretical work proves that estimation with such data will yield consistent parameter estimates 3 bayesian parameter estimates are not affected by non stationarity although some analysts argue that bayesian analysis is not appropriate for data that is also cointegrated a multivariate cattle price model provides a good framework for comparing these approaches because the major variables are both non stationary and cointegrated and because the model s opti

international monetary regimes and incidence and transmission of macroeconomic shocks evidence from the bretton woods and modern floating periods this paper investigates the relationship between international monetary regimes and incidence and transmission of macroeconomic shocks within the context of an open economy macro model empirical results confirm monetary interdependence and lower incidence of monetary discretion under fixed exchange rates the average magnitude and dispersion of supply shocks in bretton woods and the subsequent float is comparable however the average magnitude and dispersion of real demand shocks under bretton woods seems higher overall the international monetary regime may pose important constraints to policymakers in open economies economists have long recognized the role of a flexible exchange rate regime in insulating economies and allowing independent pursuit of monetary policy however experience with floating rates in the post bretton woods period led many to question the merits of flexible rates with increased volatility in nominal and real exchange rates and the implied effects of this volatility on international trade flows although fixed rates reduce uncertainty and transaction costs compared with flexible rates these benefits may be outweighed by increased output volatility due to sticky prices and increased international interdependence if countries face idiosyncratic shocks independent monetary policy is needed to stabilize the domestic economy theoretical work on the effects of international monetary regimes has been inconclusive helpman 1981 dornbusch 1983 turnovsky 1983 and others provide evidence that exchange rate arrangements cannot be ranked unambiguously in terms of their impact on macroeconomic stability or domestic welfare instead several studies have analyzed macroeconomic performance under different historical exchange rate arrangements using macroeconomic data from the bretton woods and the subsequent floating regime baxter and stockman 1988 found no clear relationship between exchange rate flexibility and output stability or synchronization of the business cycle using bivariate vector autoregressions vars bayoumi and eichengreen 1994 analyzed the standard

forecasting agricultural exports and imports in south africa the implementation of wide ranging policy reforms including trade and exchange rate policies is improving the efficiency of the south african economy and its reintegration into the global economy with rapid export expansion agricultural exports in the southern african customs union increased from r8 14 billion in 1995 to r23 0 billion in 2003 whilst agricultural imports rose from r6 83 billion to r13 84 billion during the same period this article uses alternative approaches to forecasting agricultural exports and imports in south africa the models used include exponential smoothing autoregressive integrated moving average arima vector autoregression var engle granger eg single equation and vector error correction models vecm we found that the arima and eg methods outperform the var and vecm according to theil s u statistic the var outperforms the vecm in forecasting agricultural exports in south africa the combined forecasts have a lower variance compared to individual forecasts ther

external adjustments and exchange rate flexibility some evidence from u s data this paper examines the role of the exchange rate in u s external adjustments the results show that the exchange rate is an important transmission channel of influence on prices and with longer lags on income and the trade balance the effects of the exchange rate and relative prices on the trade balance are not symmetric even in the long run exchange rate feedback is insignificant and makes little difference in trade balance adjustment there are also indications that the response of relative prices to the exchange rate shifted in recent years such changes seem to help explain the persistence of the u s trade deficit in recent years for multilateral trade but not bilateral trade with japan or germany copyright 1991 by mit press

detecting and removing discrimination under equal opportunities policies abstract this paper surveys part of the recent voluminous literature on the economics of discrimination focusing on two key questions first how should discrimination be measured and can in fact unambiguous estimates be derived as the basis for detecting where discrimination is present and setting in train measures to eliminate it second to what extent has the implementation of equal opportunities legislation improved the relative standing of women and minority workers in the labour force this section includes a discussion of the likely effects of recent changes in the law such as the equal value amendment in the uk or the introduction of comparable worth in the usa the survey concludes that our ability to detect discrimination at all precisely is still rudimentary and consequently policy measures are likely to be inefficient for this reason

real exchange rate volatility and exchange rate regimes evidence from long term data abstract using over one hundred years of historical data for the uk canadian japanese and french us real exchange rates we find that real exchange rate volatility is greater for flexible exchange rate periods than for fixed rate periods

political vs currency premia in international real interest differentials a study of forward rates for 24 countries abstract different approaches to quantifying the degree of capital mobility for a cross section of currencies particularly saving investment correlations and tests of real interest parity have appeared to show a surprisingly low degree of financial integration we use a new data set forward rate data for 24 countries including many small industrialized countries and seven ldcs to decompose the real interest differential into two parts the covered interest differential or political premium and the real forward discount or currency premium the latter in turn can be decomposed into the exchange risk premium and expected real depreciation we find a high degree of capital mobility across political boundaries for most of the g 11 countries plus hong kong and singapore for our sample period of 1982 to 1987 even for most of the other ldcs and smaller industrialized countries for which covered interest parity clearly fails the political premium is not as big a component of the real interest differential as the currency premium france would appear to have higher capital mobility than most by the criterion of real interest differentials but is seen in fact to have low capital mobility by the criterion of covered interest differentials a clear example of the superiority of the latter criterion

asymmetric tournaments equal opportunity laws and affirmative action some experimental results this paper assesses whether affirmative action programs and equal opportunity laws affect the output of economic agents more precisely we find that equal opportunity laws and affirmative action programs always benefit disadvantaged groups equal opportunity laws also increase the effort levels of all subjects and hence the profits of the tournament administrator usually the firm the effects of affirmative action programs depend on the severity of a group s cost disadvantage when the cost disadvantage is severe these programs significantly increase effort levels and hence profits the opposite is true when the disadvantage is slight

monetary and exchange rate policies for international financial stability a proposal w v ithout a common monetary standard the remarkable integration of western european north american and the industrialized asian economies in both commodity trade and financial flows is less efficient and becoming untenable dissatisfaction with wildly fluctuating relative currency values euphemistically called floating or flexible exchange rates is a prime cause of the resurgence in protectionism in 1986 87 the overvalued yen forced japanese industrialists to close factories retire workers and write off once valuable investments in plant and equipment this parallels what their american counterparts were forced to do between 1981 and 1985 when the dollar suddenly became overvalued similarly the paring down of the british manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979 81 in agriculture japan and european countries are determined to insulate their domestic prices of farm products from unsettling international influences including volatile fluctuations in the yen dollar or mark dollar exchange rates thus unless exchange stability is first achieved the american government s attempt to broaden the general agreement on tariffs and trade to encompass agriculture and services is likely to fail but what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange rate fluctuations although many people

impacts of monetary and macroeconomic factors on food prices in eastern and southern africa eastern and southern africa has been experiencing relatively large increases in real food prices since the early 1980s real food prices in some african countries grew as much as 11 per year during the 1980 1996 period the huge volatility in food prices coincided with the implementation of structural adjustment programmes in several african countries this study examines the impacts of monetary and macroeconomic factors on real food prices in eastern and southern africa using the technique of cointegration and error correction modelling to test the long run relationship between real food prices and the factors that influence their behaviour in selected african countries demand elasticities for food are estimated for selected countries the empirical results show that changes in domestic food production coupled with income trade exchange rate and monetary policies have significant impacts on real food prices with wide implications for food availability and food security in the region

international trade with forward futures markets under exchange rate and price uncertainty abstract the paper examines a risk averse firm s decisions on the level of trade when the exchange rate and the commodity price are uncertain and the extent of forward exchange and commodity futures commitments first we verify the separation theorem and the full double hedging theorem second we investigate the implications of the existence of both forward foreign exchange and commodity futures markets in comparison to the case where only one or no market is available to the firm the second exercise enables us to focus on conditions under which establishing forward futures arrangements promotes international trade

excess returns and official intervention some cross country evidence this paper presents a simple model of foreign exchange market intervention which shows that such intervention introduces positive structure into exchange rate changes evidence linking this structure to observable filter rule profits is also provided

optimal loan contracts and floating rate debt in international lending to ldcs abstract most ldc debt is at floating interest rate and the wisdom of this choice is analyzed here for a prototype ldc complete insurance requires repayment to increase with export revenues and import prices since the latter variables are positively correlated with libor floating rate debt yields better risk sharing than fixed rate debt and induces more investment in the ldc when default is possible repayment becomes contingent on the cost of sanctions is renegotiation states and some renegotiation costs are likely to be incurred fixed rate debt would have reduced the occurrence of default in the 80s but only marginally

currency substitution and instability in the world dollar standard comment myron ross correctly points out in his comment that u s price inflation is better predicted by the american money supply mlus than by the broader ten country world money supply mlw over the whole statistical time series from 1960 to 1980 provided in mckinnon s 1982 article specifically he showed that american price inflation is more highly correlated with mlus lagged one or two years than with mlw similarly lagged however mckinnon s present tense assertion that in general growth in the world money supply is a better predictor of american price inflation than is american money growth applies only to the weak dollar standard of the 1970 s and early 1980 s as his preceding discussion intended but failed to indicate clearly only in this later period of volatile exchange rates and price level instability in the united states do alternative hard currencies such as the yen and deutsche mark become competitive as international stores of value and units of account hence international currency substitution associated with the ebb and flow of speculation against or for the dollar significantly destabilized the demand for mlus in the 1970 s and 1980 s and only in this later period might one expect the sum of these internationally substitutable monies ml to predict world and perhaps even american price inflation better than does mlus in contrast during the strong dollar standard of the 1950 s and 1960 s the dollar was unchallenged as international money exchange rates were by and large convincingly fixed speculation for or against the dollar was incapable of substantially altering u s interest rates or of directly affecting the demand for mlus because cyclical international influences did not then destabilize the demand for dollars mlus was by itself a fairly efficient predictor of american prices thus ross s statistical results for the period 1960 to 1980 show somewhat greater predictive strength in mlus compared to ml because the 1960 s data outweigh the dissimilar data of the 1970 s let us instead partition the sample of imf data around the year 1970 whence began the transition from fixed to fluctuating exchange rates and the maturation of alternative monetary systems in europe and japan after applying similar statistical correlation procedures to those used by ross we show a striking structural shift in the world s monetary system the explanatory power of mlw increases sharply as that of mlus declines moderately tan 1982 for the early period of 1960 to 1970 table 1 shows simple correlation coefficients between annual percentage changes in money supplies and changes in american and world wholesale price indices the mlus provides a good explanation of u s prices and of world prices one to two years hence whereas the broader definition of mlw in which mlus enters with a 50 percent weight does surprisingly poorly being insignificantly correlated with american or world prices apparently money growth in industrial countries other than the united states was not then an independent source of worldwide inflationary pressure during the strong dollar standard table 2 shows the same simple correlations between percentage changes in prices and money for the weak dollar standard of stanford university please note that a typographical error giving the last word in the original title as market appeared on the cover of the june 1982 issue of this review the title was correct in the table of contents and on the article

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

the effects of macroeconomic factors on south african agriculture significant research efforts have been devoted to understanding the effects of macroeconomic factors on the agriculture sector analysing the sources of volatility in the industry is critical for designing appropriate policies to stabilize agricultural markets reduce poverty and increase economic growth agriculture is a competitive sector with prices that are more flexible than those in nonagricultural sectors this article uses annual data over the 1957 2004 period and a vector error correction model in investigating the dynamic effects of exchange rates money supply and other macroeconomic variables on the agricultural sector in south africa overall real exchange rates interest rates inflation and money supply m3 shocks have significant and persistent impacts on agricultural output prices received by farmers and farm input prices m3 and interest rate shocks tend to put agriculture in a cost price squeeze agricultural price movements are a source of macroeconomic instability in the country r

exchange rate pass through abstract the resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass through relationship so far there has not been a comprehensive survey of this literature the paper aims to fill this gap in two ways first it pieces together the theoretical literature on exchange rate pass through second it provides a critical survey of the empirical literature on exchange rate pass through emphasis is placed on the data and methodology employed in previous work this is done in order to guide future work in this growing area of research

exposure to exchange rate movements abstract this paper suggests an approach to measuring a firm s exposure which depends on the stochastic relationship between the firm s real rate of return and exchange rate movements using a simplified two country model exposure is shown to depend on the extent to which individual asset prices adjust with exchange rates the distribution of such adjustments between countries and the relationship between domestic inflation and exchange rate movements while the distribution of real and nominal positions across countries is also a determinant of exposure it is shown that purely domestic firms no foreign assets or liabilities will typically be exposed

exchange rate management the role of target zones the essence of the regime of unmanaged floating that prevailed among the major currencies from march 1973 until the plaza agreement in 1985 was that the exchange rate was treated as a residual in the process of macroeconomic policy determination admittedly there were occasions such as october 1976 in the case of the pound sterling and october 1978 in the cases of both the u s dollar and the swiss franc when particular countries became so concerned with a misalignment of their currency that they were forced to abandon benign or malign neglect but such incidents were episodic views about a proper or desirable level of the exchange rate played no systematic role in policy formulation section i explains why i judge the performance of unmanaged floating to have been unsatisfactory section ii lists the real social benefits that exchange rate flexibility can afford which should be preserved by any reformed system section iii describes the target zone proposal and explains why it would preserve the real benefits of flexibility while overcoming the weaknesses of unmanaged floating section iv sketches a possible set of comprehensive principles for policy coordination of which target zones would be one natural element

forecasting exchange rate for the australian dollar via a vis the us dollar using multivariate time series models the purpose of the paper is to forecast exchange rates by using restricted and unresticted vector autoregressive var models also introduced is an econometric model for the purpose of comparison a comparison of forecast stastistics shows that the restricted model bvar has better forecasting ability compared with the unrestricted var model however the econometric model outperforms both the study also indicates that the exchange rate relative price and three month forward rate are cointegrated thus an error correction model also is considered for the structural one and the forecasting performance improved further for this model

urban growth and uninsured rural risk booming towns in bust times abstract rapid urbanization also happens when economic growth and urban job creation are absent such as in africa and latin america during the eighties why do some countries urbanize faster while having worse economic growth this paper finds that higher aggregate agricultural risk induces rural urban migration providing an additional channel to explain the urbanization trend uninsurable expected risk will lead to rural urban migration as a form of ex ante insurance if households are liquidity constrained and cannot overcome adverse shocks the effect is robust to controlling for the traditional view of urbanization driven by industrialization and to several alternative explanations such as government spending

gender discrimination without gender difference theory and policy responses abstract this paper provides an explanation for the continued existence of gender discrimination in competitive labour markets and analyzes the effects of policies designed to alleviate it unlike previous explanations of gender discrimination this theory arises from the interaction between women and men within the household and does not rely on inherent asymmetries between women and men even though discrimination is seen to be related to factors which can be thought external to the labour market such as higher job turnover and labour market exit rates for women policies which target only labour market outcomes and do not deal with external factors can both lead to reduced discrimination and also alter external factors thereby reducing discrimination further however policies aimed at external factors will in general be less effective in reducing discrimination unless combined with more direct policies

is greater exchange rate flexibility stabilizing some evidence from us data abstract this paper examines the hypothesis that greater exchange rate flexibility is stabilizing in external adjustment processes the results indicate that floating exchange rates tend to magnify changes in relative prices without stabilizing income as the trade balance adjusts