on the link between exchange rate regimes capital controls and monetary policy autonomy in small european countries 1979 2000 we investigate international monetary policy transmission under different exchange rate and capital account regimes in eleven small open economies during the 1980s and 1990s we find no systematic link between ex post monetary policy autonomy and exchange rate regimes capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks though not strict autonomy the results are consistent both with short term autonomy for small countries even under fixed exchange rates and an open capital account and with long term dependence under flexible exchange rates and an independent stability target results also indicate that euro area market interest rates are significantly more responsive to the development of the corresponding us rate than were the previous national rates

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

to float or to fix evidence on the impact of exchange rate regimes on growth we study the relationship between exchange rate regimes and economic growth for a sample of 183 countries over the post bretton woods period using a new de facto classification of regimes based on the actual behavior of the relevant macroeconomic variables in contrast with previous studies we find that for developing countries less flexible exchange rate regimes are associated with slower growth as well as with greater output volatility for industrial countries regimes do not appear to have any significant impact on growth the results are robust to endogeneity corrections and a number of alternative specifications borrowed from the growth literature

the determinants of realignment expectations under the ems some empirical regularities abstract the stability of the ems depends crucially on realignment expectations of the market participants in this paper we discuss how to measure such expectations and how to relate them to economic fundamentals central bank reputation and institutional arrangements of the ems we find the following empirical regularities for ff dm and il dm exchange rates 1 1 expected devaluations are positively related to the current exchange rate deviation from the central parity 2 2 expected devaluations are negatively related to the length of time since last realignment in the short and medium run 3 3 the basle nyborg agreements seem to have a stabilizing effect for both currencies examined albeit through different channels

the economics of exchange rate regimes a review essay the exchange rate regime issue has taken centre stage in discussions of international economic policy much of the profession appears to have been converted to the hypothesis of the vanishing middle regime for countries well integrated into world capital markets there is little if any middle ground between floating exchange rates and monetary unification this paper considers the exchange rate regime issue in the context of recent books on the subject by w max corden and morris goldstein both authors prescribe managed floating exchange rates supplemented with inflation targeting for emerging market economies under managed floating and with a credible monetary policy the public finances in order and strengthened debt management and prudential regulation the exchange rate is free to act as a market gauge for assessing policies and as a mode of conflict resolution both authors also argue however that no exchange rate regime is a holy grail ultimately a credible exchange rate regime depends upon the trust evoked by governments there is no exchange rate regime whether of the managed floating or hard fix variety that can eradicate a history of failed stabilisation attempts

on the stability of demand for money in a developing economy some empirical issues in recent years a number of developing countries have undergone extensive reforms in the financial sector the effects of this underlying financial innovation process on the stability of demand for money have seldom been studied in the context of developing countries nevertheless these changes in the financial sector highlight the transition from one regime to the other this need necessarily follows that such a process has to be accounted for in the long run demand for money estimation here we use a three step testing procedure to study the implication of the reform process on the stability of demand for money to account for the abovementioned changes we specify the demand for money in an open economy framework using data from india an estimation procedure accounting for these changes in the specification of demand for money suggests that financial deregulation and innovation did affect the empirical stability of demand for money in india

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

large versus small players a closer look at the dynamics of speculative attacks what is the role of large players e g hedge funds in speculative attacks recent work suggests that large players move early to induce smaller agents to attack however many observers argue that large players move late in order to benefit from interest rate differentials we propose a model in which large players can do both using data on currency trading by foreign large and local small players we find that foreign players moved last in three attacks on the norwegian krone during the 1990s during the attack on the swedish krona after the russian moratorium in 1998 foreign players moved early gains by delaying attack were small however because interest rates did not increase

bank equity and macroprudential policy abstract this paper proposes an alternative macroprudential policy in the framework of gertler et al 2012 in their model the central bank subsidizes bank outside equity where the subsidy rate is determined by the shadow cost of the deposit we find that the alternative rule in which the subsidy rate responds to the aggregate bank outside equity ratio is welfare improving because it has a better stabilization effect on the bank asset deterioration after a financial shock we disentangle different channels through which macroprudential policies affect the economy and demonstrate that the better stabilization in the post crisis economy has a positive effect on the economy in normal times through security prices

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

the erm and monetary integration in the european union an investigation of long run relationships this paper investigates the integration of eu money supplies for the erm period 1979q1 93q4 an estimating equation is derived from a simple equilibrium model of the eu money markets estimation is undertaken using the johansen maximum likelihood cointegration procedure the results show that those eu members with relatively low exchange rate premia against the dm are those whose variations in the money supply have been most sensitive to those of germany

noisy signals in target zone regimes theory and monte carlo experiments abstract previous empirical evidence indicates that uncovered interest parity uip does not hold for target zone exchange rates like those in the european monetary system and in the nordic countries we explore a target zone model where the market infers the probability of a realignment of the band on the basis of a noisy signal we show theoretically and through monte carlo simulations that if the market overrates the information content in the signal then this may explain the empirical results obtained from testing uip for target zone exchange rates

german dominance in the ems evidence from interest rates abstract the paper presents an empirical analysis of german dominance and asymmetries in the ems based on a dynamic system of equations explaining national money market interest rates the hypothesis of strict german dominance of the ems is rejected however there are some noticeable asymmetries in the ems germany is a relatively strong player and has been the least dependent country in the early phase of the system since 1983 german independence has diminished in contrast france throughout and italy in the early phase of the ems have been relatively weak players in the system

macroeconomic shocks and banking regulation the recent crisis has brought to the fore the cyclical properties of banking regulation countercyclical buffers and enhanced capital requirements meant to stabilize banks balance sheets across the cycle are not costless and a delicate balance needs to be reached between providing incentives to generate value and discouraging excessive risk taking the paper develops a model in which in contrast with modigliani miller outside equity and capital requirements matter it analyses banking regulation in the presence of macroeconomic shocks and studies the desirability of self insurance mechanisms such as countercyclical capital buffers or dynamic provisioning as well as macro hedges such as cocos and capital insurance

european banking bailout bail in and state aid control abstract more than 5 years after the fall of lehman brothers and at a time where the banking union will start with a balance sheet assessment several regulatory initiatives are trying to make bailouts harder and push forward bail in as an alternative this article discusses the pros and cons of these initiatives and stresses in particular looking at various cases of banking crises that financial instability can be much more costly than bailouts it therefore pleads for i not ruling out prefunded bailouts as an alternative complement to bail in especially to deal with negative macroeconomic shocks ii making sure markets will understand that the risk of bail in is concentrated on long term bank liabilities

international transmission of inflation among g 7 countries a data determined var analysis abstract we investigate the international transmission of inflation among g 7 countries using data determined vector autoregression analysis as advocated by swanson and granger swanson n granger c 1997 impulse response functions based on a causal approach to residual orthogonalization in vector autoregressions journal of the american statistical association 92 357 367 over the period 1973 2003 we find that unexpected changes in us inflation have large effects on inflation in other countries although they are not always the dominant international factor similarly shocks to some other countries also have a statistically and economically significant influence on us inflation moreover our evidence indicates that us inflation has become less vulnerable to foreign shocks since the early 1990s mainly because of the diminished influence from germany and france

why exchange rate bands monetary independence in spite of fixed exchange rates abstract the paper argues that the reason real world fixed exchange rate regimes usually have finite bands instead of completely fixed exchange rates between realignments is that exchange rate bands counter to the textbook result give central banks some monetary independence even with free international capital mobility the nature and amount of monetary independence is specified informally and in a formal model and quantified with swedish krona data altogether the amount of monetary independence appears sizable for instance an increase in the swedish krona band from zero to about 2 percent may reduce the krona interest rate s standard deviation by about a half

credibility of policies versus credibility of policymakers standard models of policy credibility defined as the expectation that an announced policy will be carried out emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility whether a policy is carried out however will also reflect the state of the economy we present a model in which a policymaker maintains a fixed parity in good times but devalues if the unemployment rate gets too high our main conclusion is that if there is persistence in unemployment observing a tough policy in a given period may lower rather than raise the credibility of a no devaluation pledge in subsequent periods we test this implication on ems interest rates and find support for our hypothesis

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

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

unit roots and granger causality in the ems interest rates the german dominance hypothesis revisited abstract the aim of this paper is twofold first it shows that a sufficient conditions for unit roots found in ar systems to persist in var systems amount to granger non causality in any direction among the variables involved this implies that a necessary condition for the disappearance of one unit root in a var system implies granger causality in at least one direction b for first order models with non explosive variables granger causality is also sufficient for cointegration and c causality and cointegration inference are strongly affected by the omission of an important causing variable second our new analytical framework allows us to formulate and test several new variations of the so called german dominance hypothesis in a unified cointegrating framework which we define as strong semi strong and weak types 1 and 2 german dominance in addition we allow for the possibility that the dominant player may lie outside the ems so that we introduce and test the us dominance hypothesis

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

modelling probabilities of devaluations i show why when the realized rates of depreciation within the exchange rate band are regressed on a given information set and conditioned on ex post actual no realignment a la drift adjustment a peso problem is still encountered the reason is that the frequency of realignments in the data need not be the same as the frequency of the even small subjective probabilities that a realignment may take place i suggest an alternative approach to solve the peso problem and provide consistent estimates my estimates of the expected realignment rates are greater than the ones obtained using the drift adjustment method

the credibility of a fixed exchange rate how reputation is gained or lost we examine the interest rate differential between each of the four largest nordic countries and the countries of their foreign currency baskets on monthly data for the period 1978 79 92 the interest rate differential is assumed to reflect devaluation expectations which partly depend on government reputation we investigate the formation of the reputation of the government assuming that reputation is updated using bayes s formula it is shown theoretically that when there is no devaluation the improvement in government reputation is larger the larger the prior devaluation expectations for norway the evidence gives support to this assertion

portfolio behaviour in a flow of funds model for the household sector in india we estimate a flow of funds model for the household sector in india within the almost ideal demand system aids framework and examine the demand for money and the substitution effects between money and other financial assets the restricted long run model obtained using cointegration techniques provides stable equilibrium relationship between i 1 variables and broadly satisfies the axioms of rational choice in consumer demand theory we find that financial sector reform exerts a significant impact on the interest rate structure and household portfolio preferences specifically there is strong substitutability among risk free assets and a possible speculative effect in the stock market while the exchange rate strongly influences the demand for money these findings all have important policy implications

interest rate linkages within the european monetary system further analysis j costas karfakis and demetrios m moschos 1990 examine the interest rate linkages within the european monetary system ems concluding that the german interest rate plays a dominate role within the ems the authors reexamine the interest rate linkages within the ems with the addition of the interest rate of the united states their results suggest that both the united states and german interest rates play an important but not dominant role in ems interest rate linkages copyright 1993 by ohio state university press

expected and predicted realignments the ff dm exchange rate during the ems an empirical model of time varying realignment risk in an exchange rate target zone is developed expected rates of devaluation are estimated as the difference between interest rate differentials and estimated expected rates of depreciation within the exchange rate band using french franc deutsche mark data during the european monetary system the behavior of estimated expected rates of depreciation accord well with the theoretical model of bertola svensson 1990 we are also able to predict actial realignments with some success

a critical appraisal of mckinnon s complementarity hypothesis does the real rate of return on money matter for investment in developing countries this is the post print version of the final paper published in world development the published article is available from the link below changes resulting from the publishing process such as peer review editing corrections structural formatting and other quality control mechanisms may not be reflected in this document changes may have been made to this work since it was submitted for publication copyright 2009 elsevier b v

interest rate linkages in the eurocurrency market contemporaneous and out of sample granger causality tests abstract this paper examines linkages among major eurocurrency interest rates during 1994 2002 eurocurrency interest rate causal linkages are found to be much stronger with additional allowance for contemporaneous causality test results than the inference based solely on granger causality tests the impact of u s interest rates is clearly not dominant in the eurocurrency markets while the japanese interest rates are found to be quite influential german interest rates both cause and are caused by several other eurocurrency interest rates by contrast interest rates on the new currency the euro do not have a substantial influence on other eurocurrency interest rates which underscores its emerging status

asymmetry in the ems new evidence based on non linear forecasts abstract in this paper we provide new evidence on the hypothesis of german leadership and asymmetric performance in the ems in the framework of causality tests using daily data given the evidence about non linearity in financial series we propose applying non linear forecasting methods based on the literature on complex dynamic systems our analysis covers nine countries and the sample period runs until 30 april 1998 so including the more recent events in the ems history a comparison of our results with those obtained from standard linear econometric techniques leads us to conclude that inference on causality based on our non linear predictors would be preferable to that based on the standard linear approach

financial liberalisation stockmarkets and economic development abstract during the 1980s and 1990s many developing countries dcs have been engaged in far reaching reforms of their financial systems liberalising them and making them more market oriented this liberalisation involving inter alia financial de repression has been inspired partly by the work of the mckinnon 1973 and shaw 1973 m s school this paper suggests that in addition to financial de repression there has been a major new element in the development of dc financial systems in recent years the establishment and fast expansion of stockmarkets these markets have played a key role in the internal as well as external financial liberalisation processes in leading dcs further the paper finds that the actual behaviour of these markets in many countries has led to outcomes which undermine the effects of the higher real interest rates arising from financial de repression

gaining and losing erm credibility the case of the united kingdom the model of this paper highlights two aspects of credibility signaling the type of government which is assumed not to be known and for any type the likelihood that if circumstances are sufficiently unfavorable a devaluation will be impossible to avoid since not to do so would go against the government s interests these two factors have opposite implications for the link between unemployment and interest differentials high unemployment signals a tough government but also makes it less likely that even a tough government will maintain an existing parity copyright 1995 by royal economic society

financial liberalization in india and a new test of the complementarity hypothesis abstract this article reappraises the financial repression hypothesis for india in light of the partial liberalization of the financial sector in the early 1990s using for the first time state of the art multivariate cointegration and vector error correction models vecm from this more robust testing procedure we find that for the indian economy over the sample period 1951 99 money and capital are complementary suggesting that higher real interest rates will further raise the demand for money and lead to higher levels of investment furthermore testing for a structural break in the early 1990s to coincide with the liberalization of the financial sector in india suggests that these reforms have not significantly changed the complementary relationship between money and capital the policy implication is that further financial liberalization maybe required in india to enhance investment and economic growth

the relationship between interest rate differentials and macroeconomic variables a panel data study for european countries abstract based on panel data regressions the relationship between 12 month interest rate differentials and macroeconomic variables is analyzed for nine european countries relative to germany stationarity properties of the variables are examined by tests developed for panel data models the distribution of the test statistic is not normal and is bootstrapped from the sample at hand all significant regression coefficients are estimated with the predicted sign in particular the inflation differential the real income growth differential relative labor costs and the current account have a strong effect on the interest rate differential hence the results indicate that governments have some scope for influencing the interest rate differential by conducting the appropriate macroeconomic policy these results are considerably more optimistic compared to earlier studies where interest rate differentials are frequently measured at 1 month and 3 months maturity included also is an analysis of whether the erm countries have gained more credibility in exchange rate policy through the exchange rate system

the effects of financial liberalization on savings and investment in uruguay the following sections are included introductionfinancial reforms financial deepening and financial crisisstylized outcomes savings investment and growthfinancial liberalization savings and investmentfinancial resource allocation at the micro levelconclusions

autoregressive modelling and money income causality detection abstract a step wise procedure based on granger s concept of causality and abaike s final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process the model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model it also provides a reasonably powerful test of causality the idea is applied to u s postwar money and income data it is found that between m1 and gnp a bivariate feedback model fits the data best between m2 and gnp a one way causal model from money to income performs better diagnostic checks applied to our model seem to indicate the adequacy of our approach

the structure of interdependence in international stock markets abstract this study investigates the dynamic structure of nine major stock markets using an error correction model and directed acyclic graphs dag the dag representation provides a structure of causality among these markets in contemporaneous time building on this contemporaneous structure and the estimated error correction model innovation accounting techniques are applied the results show that the japanese market is among the most highly exogenous and the canadian and french markets among the least exogenous in our nine market study the us market is highly influenced by its own historical innovations but it is also influenced by market innovations from the uk switzerland hong kong france and germany the us market is the only market that has a consistently strong impact on price movements in other major stock markets in the longer run

money and capital in economic development a test of the mckinnon hypothesis for nepal note in an important book mckinnon 1973 offered the hypothesis that in developing countries the demand for money broadly defined is complementary to the demand for physical capital the hypothesis is derived from an outside money model in which economic units are constrained to self finance and there are considerable indivisibilities in investment a much quoted empirical study by fry 1978 and published in this journal contrasted the transmission mechanism in mckinnon s model with that of shaw s 1973 debt intermediation model using pooled data from ten asian countries fry tested the demand for money functions implicit in each model and found that the evidence favored shaw s approach fry conceded that his sample included countries in which financial development had proceeded to such an advanced stage that modern financial assets other than broad money might be used as repositories of funds being accumulated for the purpose of eventual real investment he concluded that it would be necessary to look much farther down the development ladder to some of the world s least developed countries in a search for complementarity p 474 subsequently molho 1986 has stressed the intertemporal nature of complementarity to argue that the mckinnon and shaw approaches need not be considered mutually exclusive this occurs because most projects are financed in part with own funds and in part from borrowed funds thus there is contemporaneous substitutability between deposits and physical capital but intertemporal complementarity with current deposits intended to finance future investment while this may be a realistic adaption of the mckinnon model as fry 1988 points out it requires the model to be interpreted as an inside money model in which there are borrowing constraints and indivisibilities that prevent some investors from borrowing all they wish to borrow for lumpy investments and this is not consistent with mckinnon s own statement of his model in this note therefore we report the results of a test of the complementarity hypothesis on data for nepal

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

exchange rate stabilization in the erm identifying european monetary policy reactions abstract we develop the structural var models for european countries france denmark and germany during the erm period to examine the monetary policy reactions especially the within erm exchange rate stabilization in addition to analyzing the impulse responses and variance decomposition we present the full monetary reaction function in an interpretable manner without introducing additional assumptions the results suggest some asymmetry in exchange rate stabilization non german exchange rate stabilization is stronger than german exchange rate stabilization but do not support the hypothesis that german monetary policy was independent of the erm

special exchange rates for capital account transactions the governments of developing countries are constrained in the effective implementation of domestic policy by the interlinkages of national and international financial markets domestic macroeconomic conditions are influenced by the interaction of national and world interest rates and prices and through the impact of real exchange rates on employment the domestic responses to changes in these factors are often strong and rapid this article suggests that dual rates can indeed be used successfully as a strictly transitory policy to offset sudden shocks in capital markets the article develops models which indicate why these dual systems are able to prevent inflationary or recessionary pressures caused by a misaligned exchange rate in the short term while free capital account rates can cut the flow of capital flight however a dual rate system cannot prevent a possibly equivalent loss of foreign reserves that will ultimately result because of the impact of the overvaluation of the commercial rate on the trade balance in the longer term a dual rate system with a misaligned commercial rate exacerbates the government s deficit ultimately real wages must be cut and real interest rates raised to generate sufficient foreign exchange to finance the external debt thus a dual rate works well if the commercial rate is maintained close to the equilibrium level

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

financial deregulation and segmented capital markets the case of korea abstract this paper deals with the relation between the official and the unregulated or curb segments of the capital market in korea the paper focuses on the behavior of officially controlled interest rates paid on time deposits and on freely determined curb market interest rates the effects of financial deregulation on interest rates investment and growth are investigated it is argued that under some plausible circumstances financial deregulation can generate significant crowding out in the curb market reducing the total degree of financial intermediation the empirical results provide some support to the crowding out hypothesis and indicate that changes in the officially controlled time deposit rate have been positively related to changes in the freely determined curb market interest rate an aggregate investment function is also estimated for korea it is found that an increase decrease in the curb rate discourages encourages investment on the other hand increases in the real volume of credit intermediate in the official segment have a positive effect on real aggregate investment

does financial liberalization really improve private investment in developing countries assuming that liquidity constraints exist in most developing countries the majority of analysts believe that increasing real interest rates will raise the volume of lending and hence private investment the author focusing on the demand for capital goods argues that the positive effect on the domestic credit market may be offset by the negative effect of a portfolio shift from capital goods and public bonds into monetary assets the author also demonstrates that a policy of financial liberalization could increase the public sector s demand for domestic credit thus limiting the funds available to the private sector this crowding out does not result from a change in the government s behavior but from a shift in the portfolio of private agents higher demand for bank deposits reduces the private sector s willingness to hold government bonds so the public sector must finance a given budget deficit with more domestic credit simulations for argentina for 1961 1982 suggest that the low response of private investors to changes in interest rate policy in those 20 years was attributable not to the low values of interest elasticities but to the interaction of the mechanisms allowed for in the model which tends to neutralize the impact of such policies the author concludes that the effect of changes in interest rate policy on the demand for capital goods is weak in argentina and might affect the quality of private investment more than its quantity

transmission of u s monetary policy to europe and asymmetry in the european monetary system abstract this paper deals with the issues of the transmission of interest rates changes from the united states to europe and of the degree of asymmetry of the european monetary system i e of the extent of german leadership in determining the monetary policy of the ems zone if the transmission from the u s and the asymmetry of the ems are strong countries like france have almost no degree of freedom since both the short term and long term interest rates result from foreign influences and policies the authors try to answer those questions by estimating a model for the determination of the short term and long term interest rates in france and germany and of the dm exchange rate it appears that the assumption of asymmetrical functioning of the ems is confirmed that the dependence of long term rates on short term rates is weak in european countries and that the overall impact of changes in u s interest rates on european rates is limited

devaluation risk in target zones evidence from the nordic countries in this paper the authors estimate devaluation risk in denmark finland norway and sweden the target exchange ra te is modeled as a censored variable a shadow peg that is only observed when the equilibrium floating rate is too far from the prevailing peg using a two step procedure the authors are able to calculate time series of the probability and expected size of devaluations th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock industrial production foreign exchange reserves and the prevailing central parity copyright 1993 by royal economic society

interest rates in the nordic countries evidence based on devaluation expectations over the period 1979 92 investments in danish and norwegian kroner in the euromarket have had an annual excess return of about 2 and 1 1 per cent compared to investments in the euromarket in foreign currencies assuming risk neutrality the subjective probability of a devaluation within the next month is derived from the excess returns on the euromarket these derived probabilities are found to be inconsistent with the actual number of devaluations that have taken place over this period so that the probability of devaluation has been significantly overrated for denmark and norway

does the euro dominate central and eastern european money markets the so called german dominance hypothesis gdh claimed that bundesbank policies were transmitted into other european monetary system ems interest rates during the pre euro era we reformulate this hypothesis for the central and eastern european cee countries that are on the verge of accessing the eurozone we test this euro dominance hypothesis edh in a novel way using a global vector autoregressive gvar approach that combines country specific error correction models in a global system we find that euro area monetary policies are transmitted into cee money market rates providing evidence for monetary integration between the eurozone and cee countries our framework also allows for introducing global monetary shocks to provide at least tentative empirical evidence regarding the effects of the recent financial crisis on monetary integration in europe

dominant interest and inflation differentials within the ems abstract this paper investigates nominal interest and inflation behavior in the ems between march 1979 and september 1989 using a modified version of principal components analysis neither over the whole period nor after march 1983 has the ems functioned as a dmark zone deviating movements in inflation and interest rates between ems countries still persist most important is the division between germany the netherlands and the united kingdom on the one hand and belgium france and italy on the other differences in deflationary policies between countries inside and outside the ems appear to be the most important determinant of this result

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

monetization financial liberalization and economic development barter sector in 1954 55 the monetized sector contributed 69 to the net national product of india the share of the monetized sector increased to 78 6 of the net national product by 1974 75 during this period the explicit objective of monetary policy in india was to help accelerate the pace of economic development in an environment of reasonable price stability there are several versions of the financial liberalization hypothesis but the one put forward by ronald mckinnon is chosen here because of its succinctness and easy amenability to empirical verification 2 mckinnon s theory in essence deals with the effect of financial liberalization on the accumulation of capital through a policy of high real interest rates this formulation has been made operational by estimating the response of real demand for money balances and private investment to alternative rates of return under the implicit assumption that these are the only two alternative forms of assets held by the private sector 3 all this is predicated on the assumption that the effective limitation on the rate of real capital formation is the supply of real savings and not the inadequate willingness to invest most underdeveloped countries have a significant barter sector a reduction in the share of the barter sector can help to further accelerate the accumulation of capital in a barter system a good share of the factors of production is tied up in distribution away from production to achieve the double coincidence required in such a system with the

european integration and asymmetry in the ems abstract the empirical literature offers conflicting views of german dominance in the european monetary system we examine the validity of the german dominance hypothesis gdh by analyzing the responses of european central banks and money markets to monetary innovations originating both in europe european asymmetry and abroad international asymmetry our results reconcile the conflicting views in the literature the gdh is confirmed when the analysis is conducted with intervention rates before german unification results support european asymmetry with short rates before 1990 but not international asymmetry after 1990 the gdh is not supported by either set of rates

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential

the effect of government ideology on an exchange rate regime some international evidence this paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974 2009 our results clearly indicate that a left wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes nevertheless evidence is weaker when using the de jure imf course classification which is set up by ilzetzki et al 2008 in a deeper investigation we find that left wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of oecd non oecd and non eurozone countries as the impacts from government ideology on the determinant of the choice of exchange rate regime in eurozone countries disappear more importantly we present many explanations for exchange rate regime choices when macroeconomic conditions political constraints and institutions impact the choice of exchange rate regime