definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

optimal wage indexation in a multisector economy optimal wage indexation is analyzed in an economy subject to common and sector specific supply shocks and aggregate demand shocks where one sector has wage contracts and the other has a walrasian labor market it is shown that it is optimal in this setting to index wages partially to unanticipated economywide inflation and to industry specific profits consequently this study provides possible theoretical explanations for observation of both cpi indexation and profit sharing contracts and for the failure of purely aggregative indexation models to explain disaggregate level behavior copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

does one soros make a difference a theory of currency crises with large and small traders do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets to address this issue we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals even abstracting from signaling the presence of the large investor does make all other traders more aggressive in their selling relative to the case in which there is no large investors small investors attach the currency when fundamentals are stronger yet the difference can be small or null depending on the relative precision of private information of the small and large investors adding signaling makes the influence of the large trader on small traders behaviour much stronger

optimum currency pegs for latin america the postwar economic record of latin america from 1950 to 1979 is a mixed one inflation rates range from a low of 3 percent in honduras panama and venezuela to highs of 120 percent in chile 67 percent in argentina and 37 percent in brazil further these rates have been stable in the low inflation countries with a standard deviation s d of about 4 percent while in chile argentina and brazil the standard deviations in the inflation rates were 1 15 percent 95 percent and 20 percent respectively monetary growth rates exhibit the same pattern low and stable in some countries high and unstable in others real growth rates range from lows of 1 percent in uruguay to highs of 9 percent in brazil and mexico for the eighteen latin american countries as a whole the inflation rate since 1950 has averaged 21 percent with a standard deviation of 30 percent monetary growth rates 29 percent s d of 25 percent and real growth rates 5 percent s d of 2 percent one striking fact emerges from a cursory examination of this historical record countries that peg to the u s dollar experience low and stable inflation rates while those that do not exhibit high and unstable inflation rates the choice to peg to the dollar is simultaneously a decision not to inflate more than the united states it is a clear signal regarding the future supply of local money similarly a decision to inflate more than the united states is simultaneously a choice not to have a fixed

real exchange rate overvaluation and wto dispute initiation in developing countries why and when do developing countries file trade disputes at the world trade organization wto although financial conditions have long been considered an important driver of trade policy they have been largely absent from the literature on trade disputes we argue that developing country governments bring more trade dispute to the wto when overvalued real exchange rates put exporters at a competitive disadvantage this dynamic is most prevalent in countries where large foreign currency debt burdens discourage nominal currency devaluations that would otherwise serve exporters interests our findings provide an explanation for differences in dispute participation rates among developing countries and also suggest a new link between exchange rate regimes and trade policy

international coordination in the design of macroeconomic policy rules abstract the paper examines international issues that arise in the design and evaluation of macroeconomic policy rules it begins with a theoretical investigation of the effects of fiscal and monetary policy in a two country rational expectations model with staggered wage and price setting and with perfect capital mobility the results indicate that with the appropriate choice of policies and with flexible exchange rates demand shocks need not give rise to international externalities or coordination issues price shocks however do create an externality and this is the focus of the empirical part of the paper using a simple seven country model consisting of canada france germany italy japan the united kingdom and the united states optimal cooperative and non cooperative nash policy rules to minimize the variance of output and inflation in each country are calculated the cooperative policies are computed using standard dynamic stochastic programming techniques and the non cooperative policies are computed using an algorithm developed by finn kydland the central result is that the cooperative policy rules for these countries are more accommodative to inflation than the non cooperative policy rules

asean income gap and the optimal exchange rate regime this article investigates the optimal exchange rate regime in a group of asean countries which minimizes the adverse effects of foreign demand shocks on real output the real exchange rate price

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

macroeconomic stabilization and intervention policy under an exchange rate band abstract macroeconomic stabilization and foreign exchange market interventions are investigated for a small open economy with a nominal exchange rate band in a first best situation a band is not advisable from a stabilization perspective even though with money demand shocks no welfare losses are incurred with goods demand shocks narrowing the band affects the optimal coefficient of intramarginal monetary accommodation with restrictions on intramarginal interventions a band may be desirable in particular with supply shocks and no intramarginal interventions a narrower band is desirable when the central bank attaches a relatively smaller weight to price as opposed to output stability

exchange market intervention under alternative forms of exogenous disturbances abstract this paper analyzes exchange market intervention in a stochastic model of a small open economy the distinction is made between disturbances which are unanticipated and anticipated on the one hand and those that are perceived as being transitory or permanent on the other it is shown how the appropriate form of exchange market intervention is sensitive to these aspects of the disturbances of particular interest is the case of an unanticipated permanent disturbance when output may be stabilized perfectly about its frictionless level by the use of a very simple class of intervention rules the optimal rules in other cases are also discussed

optimal wage re negotiation in a closed and open economy abstract this paper investigates an economy in which there are short term wage contracts that are re negotiated under certain conditions the paper determines the optimal frequency of wage re negotiation and shows that it depends positively on measures of aggregate variability and phillips curve slope the role of optimal wage re negotiation is to mitigate the output effects of various shocks in the context of an open economy it is shown that the desirable exchange rate regime in an economy with optimal wage re negotiation depends on the stochastic structure of the economy

on becoming more flexible exchange rate regimes in latin america and the caribbean abstract this paper examines the shift from fixed to more flexible exchange rate regimes among countries in latin america and the caribbean in contrast to most traditional approaches the one followed here recognizes that fixed rates can be and often are adjusted but argues that policy makers incur a political cost from devaluation at the same time flexible exchange rates even managed ones may be very volatile with persistent misalignment a stylized model of regime choice is developed based on the perceived losses from exchange rate misalignment incurred under fixed versus more flexible regimes the model is estimated for a sample of 24 countries over the period 1978 1992 and empirical results are quite supportive misalignments proxied by current account deficits and moderate to high rates of inflation were associated with a move to more flexible rates during 1978 1986 misalignment indicators appear to have mattered less during 1987 1992 however there appears to have been a major reduction in the perceived difficulty of managing flexible rates during this period the paper then cautions against attributing differences in economic growth between groups of countries to their exchange regime the central point here is that the endogeneity of regime choice introduces selection biases into the samples of countries with fixed and with more flexible exchange regimes

the handbook of international macroeconomics preface 1 introduction rick van der ploeg amsterdam 2 quantity constrained models of open economies neil rankin warwick 3 imperfect competition and open economy macroeconomics huw d dixon york 4 relative price movements in dynamic general equilibrium models of international trade david backus nyu patrick kehoe pennsylvania and finn kydland carnegie mellon 5 international fiscal policy coordination and competition assaf razin and efraim sadka tel aviv 6 capital taxation in the world economy a lans bovenberg tilburg 7 history of the international monetary system implications for research in international macroeconomics and finance barry eichengreen berkeley 8 on inflation unemployment and the optimal exchange rate regime george alogoskoufis athens 9 macroeconomic policy speculative attacks and balance of payments crisis pierre richard agenor and robert p flood imf 10 continuous time models of exchange rates and intervention giuseppe bertola princeton 11 stylized facts of nominal exchange rate returns casper g de vries leuven 12 partial versus general equilibrium models of international capital market equilibrium 13 sovereign debt kenneth kletzer santa cruz 14 growth and external debt daniel cohen cepremap 15 growth and deficits in an interdependent world index

the choice of an exchange rate system and macroeconomic stability the recent theoretical literature regarding the choice of an exchange rate system has focused on how the choice of an exchange rate regime will affect the stability of the economy while the methodology and emphasis of the various theoretical arguments differ the common thread that runs through all is the notion that the appropriate exchange rate system will differ with the nature of the disturbance to the economy the substantive differences existing among the various studies are to a certain extent due to different criteria used for exchange system choice it is not surprising that one s beliefs with regard to the effect of exogenous shocks on exchange system choice will be sensitive to the objective function used for instance fischer 1977 and frenkel and aizenman 1982 focus on the minimization of real consumption shocks and derive the result that the greater the domestic money shocks the more likely is a float alternatively flood 1979 and aizenman 1983 with an objective of minimizing domestic price shocks conclude that the greater the domestic money shocks the more preferred is a fixed exchange rate while the evidence presented below will indicate which approach is more consistent with actual country practice we should first consider the rationale behind the criteria considered fischer appeals to basic micro theory when he says that concavity of utility functions expressed as a function of consumption justifies concern with the stability of consumption but it is not obvious that price stability is of itself undesirable

aspects of the optimal management of exchange rates abstract this paper shows that the choice of the optimal exchange rate regime depends on the stochastic shocks affecting the economy the higher the variance of real shocks the larger the desirability of fixity of exchange rates the desirability of exchange rate flexibility increases the larger are the variances of the shocks to the demand for money to the supply of money to foreign prices and to purchasing power parities when the economy produces traded and non traded goods the desirability of exchange rate flexibility diminishes the higher is the relative share of non traded goods and the lower are the elasticities of demand and supply of the two goods

the degree of openness and the cost of fixing exchange rate abstract fixing the exchange rate entails costs in terms of suboptimal output if nominal wages are sticky it is generally assumed that these costs decrease with the degree of openness we demonstrate that they are either non monotonic or increasing in openness

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

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

exchange rate bands with price inertia this problem by committing member states to taking suitable action to prevent cross parities from straying outside some given publicly announced range and williamson s proposal for target zones was explicitly aimed at preventing exchange rate misalignment among the principal industrial countries subsequently the louvre accord struck between members of the group of seven in i 987 involved unpublished commitments designed to constrain fluctuation between the u s dollar and the currencies of its major trading partners funabashi i988 given the obvious practical importance of understanding the implications of such policy commitments for the economy in general and the exchange rate in particular it is perhaps not surprising that the seminal work by krugman i 988 i989 on exchange rate determination within a band has aroused considerable interest under the assumption that the velocity of money follows a brownian motion process he obtains an explicit solution for the exchange rate as a function of the fundamental which shows that the presence of a commitment to intervene so as to defend the band exerts a stabilising influence on the exchange rate even before any such intervention takes place in their contribution to this emerging literature froot and obstfeld i989 note that krugman s minimalist stochastic specification can be derived from a monetary model of exchange rates where prices are perfectly flexible and full employment prevails where international interest differentials match expected exchange rate changes and the exchange rate preserves purchasing power parity cf mussa 1976 and they show that the behaviour of the rate inside a currency band can be obtained using results on regulated brownian motion processes cf harrison i985 using the same framework and techniques flood and garber i989 indicate how the rate will respond to noninfinitesimal intervention and svensson i 989 examines the effect of bandwidth on the stochastic behaviour of interest rates klein i989 considers the effects of uncertainty about the width of the band

exchange intervention policy in a multiple country world abstract intervention policy is examined in a three country model employment and output in each country depend upon the domestic currency value of a natural basket of currencies called the sally each country will find it desirable to intervene to stabilize its sally rate if capital movements are more volatile than trade flows this is a natural generalization of well known small country results however in this general equilibrium setting it is clear that such a policy can destabilize employment in another country and lead to retaliation currency unions are also examined and found to have similar spillover problems

real wages and the terms of trade alternative indexation rules for an open economy wage indexation attempts to fix real wages throughout the length of labor contracts regardless of the source of price fluctuations many of the economic disturbances experienced recently in industrial countries have called for changes in real wages especially those disturbances altenng the terrns of trade between domestic and foreign goods this paper examines the desirability of indexation when such changes in the terms of trade occur there are two real wages in an open economy producing a product differentiated from those abroad the nominal wage deflated by the price of the domestic good and by a price index composed of domestic and foreign goods the producer responds to one real wage and labor responds to the other when the terrns of trade change these two real wages diverge so that fixing one real wage through indexation still allows the other real wage to vary this article will examine the effects of this

comparing the intensity of exchange market intervention with frenkel and aizenman s index of managed float abstract the large literature on the optimum intensity of foreign exchange market intervention contains two different characterizations of the central bank s policy choice variable most of the literature focuses on the central bank s intensity of intervention in the foreign exchange market and its implications for the domestic money supply an important contribution by frenkel and aizenman 1982 however carries out its analysis in terms of a so called index of managed float this note clarifies the relation between these policy measures by deriving the frenkel aizenman index from a standard specification of financial market equilibrium

an econometric framework for evaluating the efficiency of a market for transmission congestion contracts abstract the goals of this paper are to 1 simulate the ex ante riskiness of purchasing a tcc and 2 evaluate the efficiency of the tcc market in new york state to determine if there is evidence of under pricing three var models are estimated using only market data available before the auction this model is then used to simulate the daily payouts of a tcc for the following summer a monte carlo procedure simulates the daily summer temperatures the levels of quantity demanded and prices over the summer months the main empirical result is that the market price paid for the most important tcc in terms of volume the hudson valley to new york city is higher than the mean of the simulated payouts even though the actual payout was higher than the market price the market prices for the other two tccs are lower than the means of the simulated payouts and as a result there is no consistent evidence of under pricing in this analysis of the market for six month tccs in the summer of 2006

optimal monetary policy and wage indexation under alternative disturbances and information structures the interdependence between the optimal degree of wage indexation and optimal monetary policy is analyzed for a small open economy under a variety of assumptions regarding 1 relative information available to private agents and the stabilization authority and 2 the perceived nature of the disturbances impinging on the economy the distinctions between 1 unanticipated and anticipated disturbances and 2 permanent and transitory disturbances are emphasized the extent to which stabilization is achieved is shown to depend upon the nature of the disturbances and the available information the policy redundancy issue is emphasized implying that optimal rules can frequently be specified in many equivalent ways copyright 1987 by ohio state university press

is equilibrium indexation efficient this paper investigates the welfare properties of equilibrium indexation in a decentralized economy if indexation is costless so all firms index then the equilibrium degree of indexation is efficient but if indexation is costly and this leads some firms not to index equilibrium indexation is inefficient because indexation has externalities for nonindexed firms firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages the results do not depend on the relative importance of real and nominal shocks

liability dollarization exchange market pressure and fear of floating empirical evidence for turkey the objective of this article is to examine the relationship between liability dollarization and the exchange market pressure emp in turkey within an autoregressive distributed lag ardl and granger causality framework using monthly data from 1991 12 to 2006 08 the findings suggest that there exists a long term equilibrium relationship between emp and liability dollarization where liability dollarization granger causes emp both in the short and long run with no evidence of reverse causality this suggests that the predominance of foreign currency liabilities in the banks balance sheets in turkey induces a selling pressure in the exchange market as well as a fear of floating

payoff complementarities and financial fragility evidence from mutual fund outflows the paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets analyzing mutual fund data we find that consistent with a theoretical model funds with illiquid assets where complementarities are stronger exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets we also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors we present further evidence that these results are not attributable to alternative explanations based on the informativeness of past performance or on clientele effects we analyze the implications for funds performance and policies

market performance and bidders bidding behavior in the new york transmission congestion contract market abstract using publicly available bidder level bids data for transmission congestion contracts tccs and the realized awards of tccs in the nyiso monthly reconfiguration auctions from june 2000 to december 2004 we examine both market performance and bidders bidding behavior in the auctions the data show significant under pricing in the realized awards of tccs theories suggest that under pricing may arise from risk aversion monopsonistic market power or winner s curse our empirical analysis illustrates that all of the three effects play a role in the nyiso tccs market both market performance and bidders bidding strategies can be best explained by the theoretical model with asymmetric information and risk averse bidders

devaluation and liberalization in the presence of tariff and quota restrictions an equilibrium model abstract the purpose of this paper is to examine and compare the effects of devaluation and trade liberalization policies on a monetary economy which uses quotas in contrast to an economy which uses tariffs this is done in a general equilibrium framework the paper also investigates the reasons for coupling liberalization policies with a devaluation

hedging winner s curse with multiple bids evidence from the portuguese treasury bill auction auctions of government securities typically permit bidders to enter multiple price quantity bids despite the widespread adoption of this institutional feature and its use by bidders the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically this paper proposes that bidders use multiple bids to adjust for winner s curse by spreading her bids a bidder aligns her outcome more closely to the aggregate outcome of the auction this hypothesis is tested using bidding data from treasury bill auctions in portugal i find that ceteris paribus a bidder submits a greater number of bids and disperses prices on these bids more widely when there is a greater potential for winner s curse in particular both these measures of bid spreading increase with the volatility of market interest rates and the expected number of participating well informed bidders

optimal foreign exchange rate policy for a small open economy abstract this paper examines optimal exchange rate policy for a small open economy which faces temporary and pemanent real and nominal disturbances it demonstrates that exchange rate stabilization is desirable if most diturbances are nominal if most disturbances are real then stabilization should be greater 1 the greater the fraction of exchange rate variance accounted for by permanent disturbances 2 the greater the information available to firms in setting the wage 3 the greater the fraction of exchange rate variance attributed to domestic productivity shocks compared with foreign relative price shocks and 4 the more elastic is labor supply

an efficient ascending bid auction for multiple objects when bidders exhibit multi unit demands standard auction methods generally yield inefficient outcomes this article proposes a new ascending bid auction for homogeneous goods such as treasury bills or telecommunications spectrum the auctioneer announces a price and bidders respond with quantities items are awarded at the current price whenever they are clinched and the price is incremented until the market clears with private values this dynamic auction yields the same outcome as the sealed bid vickrey auction but has advantages of simplicity and privacy preservation with interdependent values this auction may retain efficiency whereas the vickrey auction suffers from a generalized winner s curse

determinants of exchange rate regime switching abstract exchange rate policy in many emerging markets shifts between a stronger and weaker commitment to peg this observation raises the following questions which we address in our paper does intervention policy exhibit switching and if so what causes policy to shift the theoretical literature increasingly points to the critical importance of financial fundamentals chinn m d kletzer k m 2001 imperfect information domestic regulation and financial crises in glick r moreno r spiegel m eds financial crises in emerging markets cambridge university press cambridge pp 196 237 dooley 2000 chang r velasco a 2005 monetary policy and the currency denomination of debt a tale of two equilibria kennedy school of government working paper series harvard university cambridge massachusetts among others direct empirical validation to date is limited however although relevant intuitions come from duration and indicators literature kaminsky g l reinhart c m vegh c a 2004 when it rains it pours procyclical capital flows and macroeconomic policies nber macroeconomics annual national bureau of economic research inc domac i peria m s 2003 banking crises and exchange rate regimes is there a link journal of international economics 61 41 72 tudela m 2004 explaining currency crises a duration model approach journal of international money and finance 23 799 816 we use a panel of quarterly data starting 1985 through 2004 for 14 countries mainly from latin america and east asia and adopt a novel two step empirical strategy first we apply regime switching methods to two simple indices of central bank exchange rate policy this generates likelihoods of high and low intervention in the second step we establish the variables that determine these probabilities we find strong evidence that the economy s balance sheet and economic performance determine the likelihood of switching in the exchange rate regime specifically an increase in reserve currency debt relative to assets raises potential capital losses from devaluation and reduces the probability of switching to a low intervention regime as does a decline in growth the purpose here is not to present an alternative regime classification levy yeyati e sturzenegger s 2005 classifying exchange rate regimes deeds vs words european economic review 49 1603 1635 reinhart c m rogoff k 2004 the modern history of exchange rate arrangements a reinterpretation quarterly journal of economics available at http www puaf umd edu faculty papers reinhart papers htm but to establish the relative importance of different constraints on the central bank which has policy implications the empirical approach and specification is flexible to whether intervention is discrete or gradual and to whether or not the central bank sterilizes

output variability under monetary policy and exchange rate rules this paper examines the controversy concerning the relative desirability of fixed versus flexible exchange rates by examining whether a country can achieve a smaller variance of domestic output around its full employment path operating under an exchange rate rule or under a money supply rule the paper finds that neither policy will always dominate the other however it does find that if shocks in one market of the economy are large relative to shocks to other markets then one type of rule can be shown to dominate the other

on the dynamic non equivalence of tariffs and quotas in the monetary model of the balance of payments abstract this is a reply to a comment by daniel fried and tower 1984 regarding the observation in blejer and hillman 1982 that the adjustment mechanism of the monetary model of the balance of payments provides another instance of tariff quota asymmetry

stabilization with wage indexation and exchange rate flexibility abstract this survey examines the role of wage indexation and exchange rate policy in dampening fluctuations in output around its target level it is demonstrated that the appropriate choice for wage indexation and exchange rate flexibility is highly sensitive to the nature and the relative importance of the shocks impinging upon the economy as well as to the relevant parameters in the economy moreover the question of the desired flexibility of the exchange rate should be studied in the context of wage indexation and vice versa this interdependence raises the possibility of both policies being complements or substitutes to each other depending on the number of shocks that perturb the economy

openness relative prices and macro policies abstract this paper analyzes the role of relative prices in the conduct of wage indexation monetary policy and exchange rate policy in a small economy producing traded and nontraded goods under a managed float exchange rate regime it is shown that the beneficial effect of using relative prices in addition to aggregate prices as indicators for the conduct of the above policies increases with openness the response of policies to relative prices rises with openness and has dampening effects on the volatility of deviations from purchasing power parity

measuring the degree of exchange market intervention in a small open economy abstract in this article i introduce an index of intervention activity which can be calculated on the basis of observed data this intervention index measures intervention activity as the proportion of exchange market pressure relieved by exchange market intervention the properties of the intervention index are established analytically using a model of a small open economy with rational expectations the index is used to calculate measures of bilateral and multilateral intervention for canada over the period 1975 1990

the forward exchange market speculation and exchange market intervention this paper examines two issues the first is the role of speculation in stabilizing the economy against stochastic disturbances increased speculation i stabilizes domestic income against disturbances in the domestic bond market and forward exchange market ii exacerbates the effect of foreign disturbances and iii may dampen or augment the effect of money market and output supply disturbances the second issue is the role of the forward market in stabilization policy forward market intervention does not provide monetary authorities additional leverage in stabilizing income beyond unsterilized spot market intervention intervention rules based on reactions to both the forward and the spot exchange rates however can outperform intervention policies responding to the spot rate alone regardless of the market in which intervention occurs

auctions of divisible goods with endogenous supply abstract uniform price auctions are studied in which the seller may cancel part of the supply after observing the bids this feature eliminates many of the collusive seeming equilibria of the auction in equilibrium the seller always sells the full quantity

estimating the degree of interventionist policies in the run up to emu based on a theoretical monetary exchange rate model in continuous time this article establishes a sequential estimation framework which is capable of indicating central bank intervention in the run up to a currency union using daily pre european monetary union pre emu exchange rate data for the countries of the current euro zone we find mixed evidence of active pre emu intervention policies so called institutional frontloading strategies our estimation framework is highly relevant to economic and political agents operating in financial markets of the upcoming emu accession countries

a re examination of the monetary model of exchange market pressure canada 1963 1988 in re evaluating the performance of the girton and roper 1977 two country monetary model of exchange market pressure emp for canada estimates are provided for an extended specification that allows for unrestricted dynamics results show the hypothesized negative effect of domestic credit growth on emp to be supported throughout the relevance both of the dynamics and of the hypothesized unitary tradeoff between exchange rate and international reserve movements for bank of canada policy is demonstrated for the sequence of fixed and floating exchange rate regimes contained in the 1963 1 1988 1 sample

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

on optimal wage indexation the observed practice of contracting for labor services in advance introduces stickiness or friction into the economic system in the presence of monetary and real stochastic disturbances the stability of the levels of employment and output hinges on the nature of the wage contracts in this paper we demonstrate the existence of optimal indexation schemes that are capable of eliminating the aforementioned friction by duplicating the equilibrium that would obtain if labor services were contracted for after the stochastic disturbances were realized

bidder behavior in multiunit auctions evidence from swedish treasury auctions we analyze a unique data set on multiunit auctions which contains the actual demand schedules of the bidders as well as the auction awards in over 400 swedish treasury auctions first we document that bidders vary their prices bid dispersion and the quantity demanded in response to increased uncertainty at the time of bidding second we find that bid shading can be explained by a winner s curse driven model in which each bidder submits only one bid despite the fact that the bidders in our data set use much richer bidding strategies third we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information the winner s curse and the champion s plague while the models of multiunit auctions serve as useful guideposts our empirical findings also point to several new areas of research in multiunit auctions

the optimal mix of wage indexation and foreign exchange market intervention this paper develops a model in which wage indexation and foreign exchange market intervention can be used simultaneously for policy purposes with the type of wage indexation used there is shown to be a clear separation of function between the two instruments intervention should be used only to offset demand side disturbances while indexation should depend upon both demand and supply disturbances copyright 1988 by ohio state university press

redemption risk and cash hoarding by asset managers abstract open end mutual funds face investor redemptions but the sale of the underlying assets depends on asset managers portfolio decisions if asset managers use cash holdings as a buffer to meet redemptions they can mitigate fire sales of the assets if they hoard cash in response to redemptions they will amplify fire sales we present a global game model of investor runs and identify conditions under which asset managers hoard cash in an empirical investigation of bond mutual funds we find that cash hoarding is the rule rather than the exception and that less liquid bond funds display stronger cash hoarding

the heterogeneity of labor wage indexation and welfare abstract when disturbances are nominal full indexation seems to be optimal for real disturbances less than full indexation should be used in the indexation literature this general result is obtained by assuming that labor is homogeneous and indexation is applied throughout the economy in the paper we show that some qualifications need to be made when labor is heterogeneous and only a small portion of labor market is covered by indexation

floating exchange rates expectations and new information abstract this paper analyzes the relationship between forward exchange rates future spot rates and new information a stochastic model of exchange rate determination is used to formally show how unanticipated changes in the exchange rate determinants or news affect the spot rate the empirical analysis indicates that new information plays an important role in explaining the market forecasting error or difference between the spot rate and the forward rate determined in the previous period

taylor rules and the canadian us equilibrium exchange rate abstract this paper identifies the canadian us equilibrium exchange rate based on a simple structural model of the real exchange rate in which monetary policy follows a taylor rule interest rate reaction function the exchange rate is explained by relative output and inflation as observable variables and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate using canadian data over 1974 2009 we jointly estimate the unobserved components and the structural parameters using the kalman filter and bayesian technique we find that canada s equilibrium exchange rate evolves smoothly and follows a trend depreciation the transitory component is found to be very persistent but much more volatile than the equilibrium rate resulting in few but prolonged periods of currency misalignments

macroeconomic stabilization through taxation and indexation the use of firm specific information abstract this paper considers two alternative approaches to stabilizing an economy with firm specific productivity disturbances the first uses wage contracts tying wages in each firm to these disturbances as well as the price level the second uses a taxation scheme together with a wage indexation rule tying wages to prices alone both these schemes are viable as long as the firm specific disturbance is known to all agents if the firm alone observes the productivity disturbance under either scheme it has an incentive to misrepresent current conditions however a combination of these two schemes is both welfare maximizing and incentive compatible

optimal and time consistent exchange rate management in an overlapping generations economy abstract this paper analyzes exchange rate management in a simple overlapping generations model this framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage when the chief concern is to provide a desirable store of value a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate the same is true when the government is concerned with maximizing total expected seigniorage although more intervention is typically desirable when generating seigniorage is the major objective when seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value a national currency may not be viable in the absence of exchange controls such controls may be justified in this situation

money stock targeting and money supply an intertemporal optimization approach with an application to canada we propose a model of the short term behaviour of the monetary authorities of a small open economy that is willing to stabilize to some extent its bilateral exchange rate vis a vis a dominant partner the optimal money supply strategy is derived using intertemporal optimization arguments in a rational expectations environment the model is formulated so as to avoid the time inconsistency problem stressed by kydland and prescott 1977 it allows econometric estimation of the optimal money supply rule as well as of the parameters of the intertemporal utility function and of the function that defines the intermediate target money stock the model is successfully estimated on canadian quarterly data using maximum likelihood techniques copyright 1988 john wiley sons ltd

dynamics of monetary intervention under managed floating abstract this paper studies the dynamics of the money stock in the presence of official intervention under fixed exchange rates and certain types of managed floating in response to an external disturbance the long run change in the stock of domestic currency is found to be the largest in magnitude under fixed rates however in the context of the present model managed floating may entail relatively larger short run movements this is the case when foreign disturbances originate in the commodity market and under certain conditions even if they originate in the asset market

staggered wage setting and exchange rate policy in an economy with capital assets abstract this paper investigates the effects of exchange market intervention on price output stability tradeoffs in the context of a moderately sized open economy in this model which incorporates interest bearing capital assets monetary accommodation is the mechanism whereby exchange rate indexation is achieved it is seen that increased exchange market intervention reduces output variability but only at the expense of enhanced price and nominal exchange rate variability this is true of stochastic disturbances on the supply side for disturbances originating in the money market increased intervention unambiguously reduces both price and output variability

optimal wage indexation foreign exchange intervention and monetary policy this paper deals with the design of optimal monetary policy and with the interaction between the optimal degrees of wage indexation and foreign exchange intervention the model is governed by the characteristics of the stochastic shocks which affect the economy and by the information set that individuals possess because of cost of negotiations nominal wages are assumed to be precontracted and wage adjustments follow a simple indexation rule that links wage changes to observed changes in price the use of the price level as the only indicator for wage adjustments may not permit an efficient use of available information and may result in welfare loss the analysis specifies the optimal set of feedback rules that should govern policy aiming at the minimization of the welfare loss these feedback rules determine the optimal response of monetary policy to changes in exchange rates interest rates and foreign prices the adoption of the optimal set of feedback rules results in the complete elimination of the welfare cost arising from the simple indexation rule and from the existence of nominal contracts since optimal policies succeed in the elimination of the distortions issues concerning the nature of contracts and the implications of specific assumptions about disequilibrium positions become inconsequential the analysis then proceeds to examine the interdependence between the optimal feedback rules and the optimal degree of wage indexation it is shown that a rise in the degree of exchange rate flexibility raises the optimal degree of wage indexation one of the key conclusions is the proposition that the number of independent feedback rules that govern a policy must equal the number of independent sources of information that influence the determination of the undistorted equilibrium thus it is shown that with a sufficient number of feedback rules for monetary policy there may be no need to introduce wage indexation it is also shown that an economy that is not this abstract was borrowed from another version of this item

exchange rate pass through and the effects of tariffs on economic performance and welfare abstract we develop a stochastic two country general equilibrium model where prices are determined under conditions of monopolistic competition to examine the macroeconomic and welfare effects of tariffs on the world economy under alternative nominal rigidities producer currency pricing pcp and local currency pricing lcp where the exchange rate pass through is absent we find that the significance of export pricing for the effects of tariffs depends critically upon whether tariffs are anticipated or unanticipated in the former case both pcp and lcp yield the same outcome as do perfectly flexible prices although the mechanism whereby this is achieved is different in the latter case the effects of unanticipated permanent tariffs are highly sensitive to the pricing scheme adopted by exporters leading to a wide range of conflicting outcomes involving tradeoffs among key parameters

on the viability of monetary unions abstract this paper contrasts the notion of optimality with that of viability of monetary unions and attempts to provide a positive analysis of the latter by dwelling upon herbert simon s work on models of bounded rationality a macro model developed by frenkel and aizenman is appended to the above theoretical framework and it is shown that viability is strictly related to certain specific properties of the economy