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

excess returns and official intervention canada 1952 1960 research shows that filter rules in foreign exchange markets yield higher than normal profits other work indicates that central banks lean against the wind in those markets and some claim that this intervention generates profits for private speculators this study which uses daily data for exchange rates and official re serves indicates that excess profits from filter rules between the u s and canadian dollar during the 1950s are the result of intervention by the bank of canada

does democracy lead to a better environment deforestation and the democratic transition peak the relationship between democracy and environment is subject to controversy some scientists find that democracy has a positive impact in reducing environmental disruption other scholars claim that democracy tends to accelerate environmental degradation by using deforestation rates as a proxy for environmental disruption we suggest that both sides might be right our quantitative analysis has three important outcomes first there is evidence of an inverted u shaped relationship between deforestation and democracy second countries in democratic transition experience the highest deforestation rates compared to non democracies and mature democracies third in explaining deforestation rates democracy has larger explanatory power than income this last result implies that in reducing deforestation rates the emphasis should not only be on economic development but even more on democratization

official intervention in the foreign exchange market in an article in this journal dean taylor 1982 proposes a simple statistical test of the significance of central bank losses in the exchange market would random intervention be likely to result in as large a loss this comment shows that as it stands his test statistic does not allow properly for the effect of the mean level of intervention there is in fact an element of ambiguity in the question taylor poses and this is illustrated with examples taken from his empirical work the connection between the taylor test and regression analysis is noted and explored

deforestation and the rule of law in a cross section of countries relationships between deforestation and population pressure income growth and insecure property rights are examined with data from 120 countries insecure property rights are hypothesized to arise from two sources government instability or inability to enforce ownership and an absence of government accountability the former source is captured by measures of general lawlessness such as guerrilla warfare revolution and frequent constitutional change the latter is proxied by variables indicating the type of government executive frequency of political purges and the existence of an elected legislature general support is indicated for the property rights hypothesis and for the effects of population growth

private finance companies in ldcs lessons from an experiment abstract in many ldcs liberalizing the financial sector will involve creating new financial institutions in the private sector to attract untapped savings and provide new services this paper provides a detailed account of an experiment with private finance companies pfcs in pakistan the complex legal ideological and economic factors which explain the initial success and the ultimate failure of that experiment are identified it is concluded that pfcs have an important role in mobilizing rural savings but to safeguard depositors a legal framework has to be provided care should be taken that nationalized banks acting in their self interest as monopolists do not create hurdles in the provision of such minimum regulation

the economics of tropical deforestation and land use an introduction to the special issue this paper both introduces the special issue on the economics of tropical deforestation and land use and conducts a synthesis crosscountry analysis of tropical agricultural land expansion agricultural development is the main factor determining land expansion but institutional factors have an important influence income effects vary from region to region and do not always display an ekc relationship the case studies comprising this special issue provide further case study insights into tropical deforestation and land use through spatial analysis of locational factors cge modeling of policy scenarios assessing external market impacts on land clearing and modelling state interventions and taxation

a variance ratio test of random walks in foreign exchange rates the separate variance ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis using five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 the rejections cast doubt on the random walk hypothesis in exchange rates which has received support in the existing literature furthermore since the rejections are robust to heteroscedasticity they suggest autocorelations of weekly increments in the nominal exchange rate series which may be consistent with the exchange rate overshooting or undershooting phenomenon in the past decade there has been a consensus that nominal exchange rates follow a random walk process since a unit root and uncorrelated increments are both required for a random walk process the random walk is usually supported in the existing literature either because a unit root component is detected in the exchange rate series or because the increment in the exchange rate is found to be serially uncorrelated for example meese and singleton 1982 and baillie and bollerslev 1989 both find a unit root component in the exchange rate series and the evidence provided in giddy and dufey 1975 cornell and dietrich 1978 logue sweeney and willett 1978 and hsieh 1988 all suggest that the exchange rate series contains uncorrelated increments in this paper the random walk hypothesis for the nominal exchange rate series is reexamined by applying a variance ratio test developed in lo and mackinlay 1988 to five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 while there are two implications of the random walk unit root and uncorrelated increments this paper focuses on the uncorrelated increments aspect this is not only because there are some important departures from the random walk that unit root test cannot detect but also because the autocorrelation aspect may yield

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

governance and deforestation a meta analysis in economics abstract understanding which aspects of forest governance have the potential to effectively reduce deforestation is central to reversing trends in global deforestation there is a multitude of empirical studies examining this relationship using various measures of governance and study designs coming to diverse conclusions in order to identify the source of variation across studies this article conducts a meta analysis of 32 empirical cross country studies in the field of economics containing 227 estimates of the impact of different governance measures on deforestation using an ordered probit model we find that the choice of the governance measure is the main factor in explaining variations in the outcomes of the studies in particular studies using environmental policy ownership rights presence of environmental ngos and rule of law as measures of governance are more likely to find that better governance reduces deforestation in contrast studies using democracy and rights as a measure of governance are more likely to find that deforestation increases when governance is improved the finding that not all aspects of governance improvements are equally supportive of forest conservation suggests that more nuanced analyses of specific aspects of environmental governance are required to guide evidence based policy making

official intervention in the foreign exchange market or bet against the central bank evaluating official foreign exchange intervention during the 1970s using friedman s profit criterion shows that central banks have failed to stabilize the exchange markets and have lost billions of dollars the monetary authorities have resisted rate movements which results in a misallocation of resources when there is a shift in the equilibrium exchange rate counterspeculation by exchange traders reduces the destabilizing effect of central bank intervention and the consequent loss in economic welfare

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

a theory of political transitions we develop a theory of political transitions inspired by the experiences of western europe and latin america nondemocratic societies are controlled by a rich elite the initially disenfranchised poor can contest power by threatening revolution especially when the opportunity cost is low for example during recessions the threat of revolution may force the elite to democratize democracy may not consolidate because it is redistributive and so gives the elite an incentive to mount a coup highly unequal societies are less likely to consolidate democracy and may end up oscillating between regimes and suffer substantial fiscal volatility

brazilian policies that encourage deforestation in the amazon this paper shows that general tax policies special tax incentives the rules of land allocation and the agricultural credit system all accelerate deforestation in the amazon these policies increase the size of land holdings and reduce the chances of the poor to become farmers the following are the key provisions i the virtual exemption of agricultural income from income taxation makes agriculture a tax shelter ii rules of public land allocation provide incentives for deforestation because the rules used in determining the security of a claim and its land area encourage land clearing iii the progressive land tax contains provisions that encourage the conversion of forest to crop land or pasture iv the tax credit scheme aimed toward corporate livestock ranches subsidizes inefficient ranches established on cleared forest land and v subsidized credit is available for sudam approved ranches

governance and timber harvests resource economics theory implies that risks associated with weak governance have an ambiguous impact on extraction with the net impact depending on the relative strengths of depletion and investment effects previous empirical studies have found that improved governance tends to reduce deforestation but to raise oil production here we present evidence that the marginal impact of improved governance on timber harvests in developing countries during 1984 2006 was nonmonotonic it tended to raise harvests in countries with weaker governance but to reduce harvests in countries with stronger governance this nonmonotonic impact occurred for both an index of governmental integrity corruption bureaucracy quality law and order and an index of governmental stability a simulation of hypothetical increases in these governance indices to the maximum 2006 values observed in the sample predicted that improved governance would reduce harvests in most countries but could raise harvests in some with large increases occurring in countries with the weakest governance

daily effects of foreign exchange intervention evidence from official bank of canada data abstract this paper analyzes the effects of official daily bank of canada intervention in the cad usd exchange rate over the 1995 1998 period using an event study methodology and different criteria for effectiveness some evidence that intervention was systematically associated with both a change in the direction and a smoothing of the exchange rate is presented the results of the analysis however do not suggest that bank of canada intervention succeeded in reducing the volatility of the cad usd exchange rate furthermore the paper shows that the effects of intervention are weakened when adjusting for general currency co movements against the usd

the temporal pattern of trading rule returns and exchange rate intervention intervention does not generate technical trading profits abstract this paper characterizes the temporal pattern of trading rule returns and official intervention for australian german swiss and u s data to investigate whether intervention generates technical trading rule profits the data reject the hypothesis that intervention generates inefficiencies from which technical rules profit in particular high frequency data show that abnormally high trading rule returns precede german swiss and u s intervention australian intervention precedes high trading rule returns but trading intervention patterns make it implausible that intervention actually generates those returns rather intervention responds to exchange rate trends from which trading rules have recently profited

financial repression and firm self financing of investment empirical evidence from brazil analysis of 86 brazilian manufacturing firms operating during a period marked by some degree of financial repression demonstrates that investment spending influences the liquid asset holdings of firms this self finance motive is weaker than the transactions motive but in general remains statistically significant across a variety of model specifications small firms are more likely than large firms to finance investment spending through accumulation of liquid assets contrary to the complementarity hypothesis however there is some evidence that firms treat liquid assets and capital as substitutes specification tests comparing the shaw hypothesis with the mckinnon hypothesis weakly favour the complementarity model

foreign exchange market intervention in two small open economies the canadian and australian experience abstract we examine intervention by the bank of canada and the reserve bank of australia for daily data from 1989 to 1998 both central banks intervene in response to excessive exchange rate volatility and uncertainty volatility is the implied volatility of foreign currency futures options uncertainty is the kurtosis of the implied risk neutral probability density functions we also examine the impact of inflation targets unlike other studies we also consider commodity futures prices these turn out to help explain the effectiveness of intervention central bank intervention was largely unsuccessful in both countries though volatility and kurtosis were modestly affected

games played in a contracting environment we analyze normal form games where a player has to pay a price to a supplier in order to play a specific action our focus is on supplier competition arising from the fact that distinct suppliers supply different players and possibly different actions of the same player with private contracts where a player only observes the prices quoted by his own suppliers the set of equilibrium distributions over player actions coincides with the set of equilibrium distributions when all actions are supplied competitively at cost with public contracts the two distributions differ dramatically even in simple games

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

small businesses and liquidity constraints in financing business investment evidence from shanghai s manufacturing sector abstract when firms experience financial hierarchy external finance if at all available is substantially more expensive than internal finance factors such as transaction costs agency problem and asymmetric information have created such a hierarchy stiglitz and weiss 1981 argue that asymmetric information between firms and potential suppliers of external finance creates adverse selection and moral hazard problems in the credit market in developed market economies this problem of a higher cost of external finance is commonly thought to be more serious for small firms because they are more disadvantaged than their larger counterparts in accessing external finance due to several factors 1 public information on small firms is generally not available and leads to the even greater problem of asymmetric information i e more severe adverse selection and moral hazard problems these information problems have excluded small firms from bond and share markets 2 due to the lack of available means of external finance small firms rely more heavily on bank loans than their larger counterparts in addition as small firms are more interested in cultivating stable relationships with a few banks in order to secure a stable supply of credit these banks become virtual monopolies by lending to small businesses and exercise their market power in lending to small firms most of existing research considers only small firms in market economies little research has been done to understand the relationship between firm size and investment financing in any economy in transition this paper makes a contribution to the literature by studying the relationship between firm size and liquidity constraints by using a firm level data of manufacturing enterprises in shanghai during the period of 1989 1992 we consider whether small manufacturing firms in shanghai are constrained by the availability of liquidity compared with their larger counterparts when they are financing their fixed investment in a transforming economy such as china or other similar transition economies external finance relies heavily on loans from banks that are fully owned by the state due to historical reasons allocations of credit are always biased in favor of state owned enterprises such a lending bias imposes an extra cost on small chinese enterprises in financing investment as the majority of them are not state owned in such an environment our empirical results show that small manufacturing firms in shanghai are actually less liquidity constrained than their larger counterparts in financing their fixed investment this surprising result is rather different from what people normally predict based on the experience in market economies we suggest three possible explanations for this peculiar finding 1 the composition of various firm size classes plays an important role in explaining the result non state enterprises which are fast growing and efficient dominate the small firm classes their successes in the markets helps them to generate enough internal funds to smooth their investment over time 2 the presence of heavy indebtedness of large state owned enterprises may deprive them of sufficient cash available for investment decision given that state owned enterprises have been making heavy losses the central and regional governments have a liquidity problem in satisfying their huge liquidity demands 3 small enterprises in non state sectors can rely on the informal credit market to obtain funds for investment although they are excluded from the state banking system however the further trade liberalization in terms of eliminating tariffs and quotas caused by china s bid of joining the wto will erode the profits of these small enterprises as imported goods will be supplied at lower prices in addition further reforms in financial sectors may also affect the supply of external finance to small enterprises in nonstate sectors the consequence may lead to a tight liquidity constraint for small enterprises in china

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

does the fed beat the foreign exchange market abstract this paper s estimates and tests of fed intervention profits are the first that explicitly adjust for foreign exchange risk premia failure to adjust may grossly affect estimated profits profits appear economically and statistically significant whether risk premia are modeled as time constant or as appreciation s market beta depending on fed intervention the estimates are sensitive to the method of risk adjustment and to the periods used because a key variable cumulative intervention is i 1 test statistics may have non standard distributions a problem affecting past tests this paper s tests account for non standard distributions possible explanations of these profits have mixed empirical support in the literature

the profitability of us intervention in the foreign exchange markets abstract using a formula for intervention profits in which profitability measured as of date t depends on how well intervention operations predict ex post deviations from interest parity this paper shows that us intervention since the beginning of generalized floating in 1973 has earned profits for the us monetary authorities fundamental explanations for the profitability of us intervention are difficult to isolate but statistical tests suggest that it is unlikely the profits are merely the outcome of chance or a normal return to bearing time invariant risk

transmission effects of foreign exchange reserves on price level evidence from china abstract we investigate the transmission effects of foreign exchange reserves on price level in china by utilizing a nonparametric model first of all we employ var co integration analysis to obtain the number of lagged periods in every stage and then we estimate the elasticity of foreign exchange reserves to money supply and the elasticity of money supply to consumer price index respectively with nonparametric estimations finally we use the results from nonparametric estimations to calculate the cross elasticity of foreign exchange reserves to consumer price index we find that an increase in foreign exchange reserves will lead to an increase in money supply which in turn will result in an increase in price level

beating the foreign exchange market filter rule profits found in foreign exchange markets in the early days of the current managed float persist in later periods as shown by statistical tests developed and implemented here the test is consistent with but independent of a wide variety of asset pricing models the profits found cannot be explained by risk if risk premia are constant over time inclusion of the home foreign interest rate differential in computing profits has little effect on the comparison of filter returns to those of buy and hold in the early years of the generalized managed floating that began in march 1973 filter rule profits in excess of buy and hold were found for many countries logue sweeney and willett 18 dooley and shafer 6 cornell and dietrich 5 it was unclear however whether such profits indicated inefficiencies first it was not clear that risk was adequately handled in such tests and often risk was ignored second there was no evidence such profits would be available postsample and third there was no statistical test of the significance of these profits this paper uses the logic of risk return tradeoffs to analyze the role of risk in such tests and illustrates the logic in a discussion using the sharpe lintner capital asset pricing model capm although a breeden consumption based capm a merton intertemporal capm or an arbitrage pricing model apm could easily be used the paper develops a test of statistical significance appropriate to foreign exchange markets section i analyzing the rate of return on foreign exchange speculation less the foreign domestic interest rate differential the test explicitly assumes that risk premia are constant over the sample the excess rates of return observable in using filters in going from a risk free dollar asset to a risk free deutsche mark dm asset persist into the 1980 s section ii and this is true even when taking account of transactions costs it turns out that these results for the dm case do not depend very much on the interestrate differential but primarily on exchange rate behavior this is useful to know because it is often quite difficult to find matching interest rate data of high quality for a sample of nine other currencies using only exchange rates section iii shows that the excess returns made in the first 610 days of the float persist in the next 1 220 days into the 1980 s dooley and shafer 7 find similar persistence in experiments that do not use buy and hold and have no significance tests when filter rule profits have been found in spot exchange markets it has often been argued that the profits are due to risk this paper uses the capm to analyze rates of return both to buy and hold and to filter strategies it turns out that the claremont mckenna college and claremont graduate school arthur d warga douglas joines and thomas d willett offered helpful comments and ning ning koo provided research assistance

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

the role of land reform in economic development policies and politics as the extensive literature on the subject attests the issue of land reform has been and remains heatedly debated 1 the latest massive demonstration of interest came with the 1979 world conference on agrarian reform and rural development where representatives of no less than 145 nations and three liberation movements agreed that equitable distribution and efficient use of land are indispensable for rural development for the mobilization of human resources and for increased production for the alleviation of poverty fao at one time or another but especially since 1960 virtually every country in the world has passed land reform laws yet the record is far more modest than the promise a in spite of decades if not centuries tuma of land reform activities landownership remains extremely skewed concentration of landownership is almost universally increasing the mass of landless is growing rapidly and the extent of rural poverty and malnutrition has reached horrendous proportions and b in spite of widespread agreement on the need for land reform there are virtually no significant ongoing land reform programs except under extreme political pressures revolutionary in el salvador and postrevolutionary in nicaragua mozambique and angola in several countries the progressive gains achieved by land reform programs are being either eroded by the forces of economic growth mexico venezuela and south korea or purposefully canceled by public policies chile the question i want to explore in this paper is why this blatant discrepancy between rhetoric and reality or to put it another way why is land reform no longer a significant policy issue even though it remains an important political issue in most countries of the world 2 to answer we need first to explore in a positive sense what has been the nature of different land reforms that occurred in the past what were their purposes achievements and limits this will be done by developing a typology of land reforms in the third world because it is essential to distinguish carefully among a wide variety of reforms following the approach of political economy i will do this in the context of modes of production social class structure and types of land tenure

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

changing political regimes and tropical deforestation expansion of agriculture is a main cause of tropical deforestation government policies and weak property rights contribute to this process by encouraging landowners and landless to accelerate land clearing using panel data common to previous studies we add the dimension of new political regimes democratic and non democratic and investigate how the rate of agricultural land expansion in tropical countries depends on the nature and persistence of each regime we find that both new autocratic and democratic regimes have accelerated the expansion of agricultural land thus yielding support to some of the findings in the earlier literature interesting differences emerge between regions with the impact being most pronounced in latin america we interpret these results mainly in the context of increasing tenure and ownership insecurity which in turn is driven by the tendency of new regimes to implement land reforms as a form of social and economic policy or voter payback the argument is developed more formally using a simple competitive land use model that incorporates political regime dependent confiscation risk and agricultural subsidy policy

the economics of tropical forest land use options tropical deforestation is generally characterized as conversion of forest land to alternative uses notably agriculture this would suggest the need for rational decision making concerning the optimal allocation of tropical forest land between competing uses the following paper explores this problem by devising rules for determining optimal land use allocation between timber and agriculture at the stand and forest levels a complementary intertemporal model for optimal allocation of forest land to agricultural conversion at the forest level is also developed and used to derive a demand relationship for agricultural conversion which is then approximated through empirical estimation

the profitability of forward currency speculation by central banks abstract a methodology is proposed to convert stock data on a central bank s official forward position in the foreign exchange market into flow data regarding its purchases and sales of forward exchange over time the flow data enable us to determine whether the central bank s forward currency operations have been profitable or not the methodology is applied to the forward currency operations of the bank of canada we find that on the whole the bank of canada did not make systematic profits or losses on its operations

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

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

assessing the relationship between government policy and deforestation abstract the effects of public policies on deforestation are assessed in a general equilibrium framework a forest can be left in its natural state to provide a consumption benefit such as biodiversity or carbon absorption in its natural state it is subject to free access however alternatively it can be converted to a market input needed to produce a valuable final product the utility of consumers depends on the amount of the forest left standing on consumption of the forest using commodity and on consumption of a numeraire that is produced from non forest inputs only final commodities are traded with the outside world at constant prices the model is used to evaluate claims in the literature regarding the effects of government policies on deforestation in developing countries the polices examined include transportation improvements taxes and royalties on timber harvests controls on log exports a variety of agricultural policies tax incentives to promote domestic processing industries and employment opportunity enhancement

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 effect of financial liberalization on the capital structure and investment decisions of indonesian manufacturing establishments this article analyzes the consequences of financial liberalization using a large panel of indonesian manufacturing establishments it discusses whether financial reforms have had an impact on investment and on the allocation of credit and whether the effects differ depending on the type of firms the overall conclusion is that shifting from administrative toward market based allocation of credit has increased borrowing cost particularly for smaller firms but at the same time has benefited firms by giving them widened access to finance

monetary policy games with broad money targets a linear quadratic control analysis of the u s and japan abstract this paper compares the different outcomes from noncooperative and cooperative equilibria when the federal reserve and the bank of japan follow monetary policies based on broad money supply targets the analysis is an application of stochastic linear quadratic control methods and combines vector autoregressive models with forward looking efficient market models for asset prices the results indicate that the use of broad money targets bring significant welfare gains to both countries in terms of reduced volatility of nominal income broad money exchange rates and asset prices however there appears to be little difference between cooperative and noncooperative monetary policy arrangements

internal funds and corporate investment in india abstract several economists have argued that capital markets in less developed countries are fragmented fragmented capital markets retard the efficient allocation of resources and force business firms to rely on internal sources of funds using firm level data the authors examine the importance of the accelerator internal funds and depreciation for investment by manufacturing firms in india the results indicate that internal funds and depreciation have significant explanatory power in a sales accelerator model of investment and that there exists heterogeneity among firms in the link between internal funds and investment in particular internal funds are relatively more important for large firms and firms that produce luxury goods

trade policies economic growth and the direct causes of deforestation by ramon lopez gregmar i galinato please send correspondence to ramon lopez 2200 symons hall university of maryland college park md 20742 email rlopez arec umd edu tel 301 405 1281 fax 301 314 9091 gregmar i galinato 2200 symons hall university of maryland college park md 20742 email ggalinato arec umd edu tel 301 405 0477 fax 301 314 9091

the cost of a central bank leaning against a random walk abstract using a stochastic model we show that a central bank is expected to suffer a loss when it temporarily affects the exchange rate by sterilized intervention against a random walk we also demonstrate that the methodology used in several studies of the profitability of official central bank intervention biases their results towards finding positive profits this bias created by only observing periods where cumulative intervention sums to zero accounts for the seemingly contradictory empirical results of several intervention profitability studies

exchange rate uncertainty and us bilateral fresh fruit and fresh vegetable trade an application of the gravity model in order to analyse the effect of exchange rate uncertainty we apply an empirical gravity equation to two sets of us bilateral trade data fresh fruit over the period 1976 1999 for a panel of 26 countries and fresh vegetables over the period 1976 2006 for a panel of nine countries based on panel estimation methods and using both a moving sd measure and the peree and steinherr 1989 measure of exchange rate uncertainty the results show that us bilateral fresh fruit trade has been negatively affected by exchange rate uncertainty we also find some evidence that the exchange rate between the us dollar and the currencies of latin american trading partners accounts for most of the negative impact of exchange rate uncertainty on bilateral trade flows in fresh fruit in contrast when using panel estimation methods and both measures of exchange rate uncertainty we find no statistically significant evidence for any negative effect of exchange rate uncertainty on us bilateral fresh vegetable trade however

ownership risk investment and the use of natural resources the effect of insecure ownership on ordinary investment and natural resource use is examined insecure ownership is postulated to depend on the type of government regime in power and the prevalence of political violence or instability the political determinants of economy wide investment are estimated from cross country data and the results are used to form an index of ownership security when introduced into empirical models of natural resource use this index has a significant and quantitatively important effect on the use of forests and petroleum contrary to conventional wisdom ownership risk slows resource use in some circumstances

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

stabilization of the canadian dollar 1975 1986 the authors extend their earlier work on canadian intervention in the foreign exchange market in three ways 1 use daily data from 1975 to 1986 to see if results for the 1950s hold during the current float 2 extend their original model to include both stock and flow versions of the foreign exchange market and 3 compare estimates using published canadian holdings of u s dollars to estimates using actual intervention which is confidential canadian authorities continue to lean against the wind but their lagged response is longer and more variable published data effectively reflect intervention

investment in segmented capital markets bankers screening devices are identified to determine firms probability of borrowing in the formal segment of the capital market in pakistan incorporating this information investment functions are estimated using a two stage switching regressions model with endogenous switching it is concluded that firms that borrow in the formal markets behave according to the flexible accelerator model of investment while non borrowing firms plough back profits furthermore the former have higher capital output ratios and find it less difficult to adjust to their desired capital stocks compared to the latter investment determinants related to entrepreneurial and firm features are also identified

balance of trade announcements and asset prices influence on equity prices exchange rates and interest rates abstract this paper examines the informational impact of traded balance announcements on asset prices including equities currrencies long and short term debt instruments and financial futures this study finds that in the 1980s prior to the 1985 plaza agreement for international economic cooperation information in trade balance announcements seem to have influenced only interest rates however in the 1985 1987 period such announcements also influenced stock prices and currency values these influences intensity further in the 1987 1988 period thus asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation jel f30

a case study on the effectiveness of foreign exchange market intervention the italian lira september 1975 march 1977 this paper discusses italy s policies of official intervention on foreign exchange markets and their role in restoring orderly conditions after the foreign exchange crisis of february 1976 for these purposes daily time series of official intervention the exchange rate and interest rates have been collected and analyzed with standard statistical methods as well as with vector autoregression techniques the results seem to show that intervention had some effect in moderating exchange rate variability and perhaps in avoiding an unwarranted depreciation of the lira and lend some support to the contention that intervention can increase the authorities room for maneuver

do central banks lose on foreign exchange intervention a review article abstract estimates of central bank intervention losses or profits vary widely some estimates find substantial losses others profits in most cases estimated profits are not risk adjusted and risk adjustment can have large effects furthermore profit estimates involve variables integrated of order one and because of this test statistics may have nonstandard distributions few studies take this into account estimates of risk adjusted profits for the us fed and the swedish riksbank with allowances for possible nonstandard distributions suggest that neither made losses and might have made significant profits

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

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

fed intervention dollar appreciation and systematic risk abstract in a four factor asset pricing model estimated on daily data fed intervention significantly affects betas of surprises in the market return expected inflation rate yield curve and corporate bond risk premium fed foreign currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar s expected appreciation rate the direction the fed desires and consistent with the signaling but not the portfolio balance channel intervention s effects on actual appreciation are less reliable they depend on unpredictable risk factor realizations even successful intervention to strengthen the dollar may be costly by increasing the dollar s systematic risk intervention reduces the attractiveness of u s relative to foreign investments further uncertainty about future fed interventions may induce resource misallocation ceteris paribus investors find it harder to estimate risk adjusted discount rates and forecast the home currency value of cash flows

measurement error and the profitability of interventions a closer look at snb transactions data abstract several studies argue that central bank profits from foreign exchange interventions should be calculated using daily data the rationale is that intra month exchange rate volatility is larger than the intra day volatility this note tests this hypothesis with transactions data

capital market imperfections before and after financial liberalization an euler equation approach to panel data for ecuadorian firms using a large set of panel data for ecuadorian firms the authors analyze the role of capital market imperfections in investment decisions and investigate whether the financial reforms introduced in the 1980s in ecuador succeeded in relaxing financial constraints to facilitate capital accumulation and growth the ecuadorian government removed administrative controls on the interest rate and eliminated or scaled down directed credit programs the model used here allows both for an increasing cost of borrowing as the degree of leverage increases and for a ceiling on leverage the econometric results suggest that both types of capital market imperfections are important for small and young firms but not for large and old firms moreover the estimated equations do not provide evidence that financial reform in ecuador has helped to relax these financial constraints

what has driven deforestation in developing countries since the 2000s evidence from new remote sensing data summary using newly released and globally available high resolution remote sensing data on forest loss we update the assessment of the cross country determinants of deforestation in developing countries we validate most of the major determinants found in the previous literature generally based on earlier time periods except for the role of institutional quality agricultural trade hitherto relatively neglected is found to be one of the main factors causing deforestation focusing on the effect of international trade we show that countries with different levels of relative forest cover react differently to a shock in agricultural exports value we also emphasize that taking countries development into account may be critical in assessing global deforestation trends the impact of trade is high in countries still endowed with a large proportion of forest cover while it is lower in countries with smaller remaining forest cover we finally estimate through a simple calibration exercise the requirements for a cost effective redd policy for compensating trade losses in an open economy exporting agricultural commodities and endowed with tropical forests we conclude that in a world with increasing global demand it might be costly to compensate totally and thus to offer the right incentives for developing countries to limit deforestation

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

financial liberalization credit constraints and collateral investment in the mexican manufacturing sector abstract we examine the impact of financial liberalization on fixed investment in mexico using establishment level data from the manufacturing sector in addition to analyzing changes in cash flow sensitivities an innovative approach explores the role of real estate as collateral and addresses a potential censoring problem the results suggest that financial constraints were eased for the smallest firms but not for larger ones however the importance of possessing real estate increased given banks reliance on collateral in their lending the results also provide microeconomic evidence consistent with the role attributed to financial accelerator mechanisms during lending booms and during post crisis recessions

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

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

the economics of tropical deforestation this paper provides a survey of first wave economic studies of tropical deforestation and land use these studies of tropical forest land conversion are generally at the cross country level we also conduct a synthesis cross country analysis of tropical agricultural land expansion the results show that agricultural development is the main factor determining land expansion but institutional factors have an important influence income effects tend to vary from region to region and do not always display an environmental kuznets curve relationship copyright 2001 by blackwell publishers ltd

a reexamination of the market timing and security selection performance of mutual funds an extended and correctly specified version of the treynor mazuy tm model is used to examine the market timing and stock selection abilities of domestic equity mutual funds this extended model controls for the inclusion of non s p 500 assets in mutual fund portfolios we document positive and significant market timing abilities for 633 mutual funds during the 1984 94 period this finding is in sharp contrast to the negative market timing abilities found when using the original tm model which does not control for non s p 500 assets security selection abilities are significantly positive and cross sectional correlations between market timing and selectivity are significantly negative the monotonic correlation between turnover and market timing is positive and that between turnover and selectivity is negative neither of these findings is evident with the original tm model or with traditional linear parametric measures of correlation

the foreign exchange costs of central bank intervention evidence from sweden abstract this study presents evidence on risk adjusted profits for the swedish central bank estimated profits can be quite sensitive as to whether rates of return are risk adjusted or not and how the risk adjustment is done various ways of adjusting for abnormal returns and extracting buy sell signals are tried results on daily data support the view that riksbank intervention did not make risk adjusted losses over the period 1986 1990 the results might be challenged as arising from inappropriate risk adjustment

how to make the central bank look good a reply in his original 1982 paper dean taylor proposes a simple test of the significance of central bank losses in the exchange market would random intervention be likely to result in as large a loss my comment spencer 1985 took his model at face value but showed that his test statistic was misspecified and that the question he posed was ambiguous yielding two alternative criteria in his comment this issue taylor has shown that if in fact central banks lean into the wind then one of these criteria is biased but this analysis raises a general question about the use of profitability indicators it shows that the conditional nature of these calculations makes them unstable and prone to manipulation when central banks lean into the wind