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

government spending the balance of trade and the terms of trade in british history abstract this paper investigates the relationship between government spending the balance of trade and the terms of trade using early british data a large open economy intertemporal framework in which ricardian equivalence holds predicts a larger effect of temporary government spending changes on the trade deficit than permanent ones further a pure switch between debt and taxes should have no effect on trade flows the results provide some support for these hypotheses although they are sensitive to sample period and the method of decomposition of government spending a negative relationship between government spending and the terms of trade is also found

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

on the determination of the external debt the case of israel abstract this paper pursues the econometric implementation of an intertemporal optimization model of the foreign debt with israeli data in this model the private sector faces perfect capital markets and maximizes utility from consumption over an infinite horizon the intertemporal budget constraint recognizes the intertemporal finance equation of the government under these conditions the effect of current disturbances in output government spending and unilateral transfers on private consumption and foreign borrowing is determined by their perceived future persistence the model passes a formal econometric test however some results are also suggestive of omitted considerations

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

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

does information matter in the commons experimental evidence abstract common pool resources cprs typically involve interaction where precise information about payoffs is absent however all experimental studies of cprs we are aware of study environments where the payoff structure is known in this paper we address the behavioral consequences of two degrees of information on the mapping between decisions and payoffs we run two treatments one with complete information on the payoff structure and one with none remarkably aggregate behavior is not significantly different between the two treatments in both cases the aggregate tendencies converge to the nash equilibrium furthermore the best reply dynamics organize individual behavior in both treatments remarkably well

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

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

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

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

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

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

exchange rate management viewed as tax policies abstract the paper develops an analytical framework which demonstrates that along the lines of the celebrated lerner symmetry theorem the various forms of exchange rate management are equivalent to corresponding tax policies to highlight the salient issues we consider two specific categories of exchange rate policies the first is a dual exchange rate regime which separates exchange rates for commercial and for financial transactions and the second is a unified exchange rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions we show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing and unified pegged exchange rate policies can be usefully cast as lump sum tax cum subsidy policies the equivalence between the various characteristics of exchange rate management and tax management suggests that exchange rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies a two country model of the world economy is used to demonstrate the international transmission mechanism of these policies

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

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

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

negative externalities in cropping decisions private versus common land this paper analyzes to what extent the entitlement of property rights affects cropping decisions when these decisions generate negative externalities to that end we implement an experimental study where agents make cropping decisions in two different treatments private and common land the results show that there are no statistically significant differences between the two treatments in the contribution to the negative externality thus revealing that the entitlement of property rights does not affect cropping decision in this context furthermore our findings indicate that the implication of the agents in activities generating negative externalities tends to increase over time thus amplifying its adverse consequences

foreign exchange controls in a black market economy abstract an investigation of the impact of foreign exchange controls in a black market economy is undertaken within the context of a choice theoretic cash in advance general equilibrium model while such controls may improve a distortion free economy s trade balance and balance of payments they are found to increase the domestic price of imports and lower the country s welfare the ramifications of black market for economic welfare turn out to be ambiguous depending crucially on the government s reaction to the leakage of foreign exchange into the economy via illegal activity

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

agricultural incentives and international competitiveness government interventions and exogenous shocks in four east african countries abstract real agricultural prices depend on international prices the real exchange rate and sector specific price interventions for the case of four east african countries this article decomposes the evolution of agricultural prices during the 1980s into these three components additionally the article computes the relative agricultural prices that would have prevailed in the absence of sectorspecific and macroeconomic distortions results indicate that a strong anti trade bias within the agricultural sector prevailed importable products tended to be protected while exportables were disprotected on the other hand government interventions and inefficiencies in the marketing process precluded the increases in the real exchange rate that took place during the second half of the 1980s from being fully transmitted into higher agricultural prices finally and depending on the country the removal of sector specific and macroeconomic distortions would have caused real agricultural prices to increase by an amount fluctuating between 10 and 68

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

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

effects of government spending on the current account with endogenous time preference this paper extends a previous model to set up a small open economy with perfect capital mobility and examines the effects of an unanticipated permanent rise in public spending on the optimal rates of private consumption and the current account the novelty of the paper is consideration of the relationship between private and public consumption in the household s utility function as well as endogenous rates of time preference it is found that the key factor determining the adjustment patterns of private consumption and the current account is the marginal utility of private consumption and of public spending which results from endogenous recursive preferences

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

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

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

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

current account effects of a temporary change in government expenditure a perfect foresight model of intertemporal utility maximization is used to analyze the current account effects of a temporary increase in government spending the relationship between the marginal utility of private consumption and the supply of public goods in the economy is shown to play a crucial role in determining the qualitative nature of the optimal current account response the link between the timing of the policy change and the magnitude of the current account effect is also examined