the singapore dollar tests of the efficient markets hypothesis and the role of news in this paper the efficient markets hypothesis emh is tested for the singapore dollar over the period from january 1978 to march 1983 the tests are conducted using the relationship between the spot foreign exchange rate and the corresponding lagged forward foreign exchange rate the tests consist of an unbiasedness test an error orthogonality test and a test of the impact of news in the singapore foreign exchange market the results indicate a certain degree of independence in the implementation of monetary policy for the singapore monetary authority

targeting nominal income an appraisal the practice of setting target growth rates for a year or more ahead for some measure of the mofiey supply is now followed by many industrialised countries however it has been suggested by a number of authors e g meade i978 in his nobel prize lecture tobin i980 in his retrospective on stabilisation policy brittan i98i that it would be more sensible to pursue targets for nominal income rather than the money supply meade for instance argues that controlling nominal income is in any case the ultimate goal of those who favour fixed monetary targets and that an excessive concentration on the means rather than the end is confusing to private agents and can lead to undesirable fluctuations in the demand for output when velocity shifts he goes on to advocate that nominal income targets should be linked to the development of wage fixing institutions designed to mimic competitive behaviour in this paper we examine the implications of such a proposal for the performance of the economy in the context of a simple stochastic macroeconomic model under rational expectations a contracting framework is adopted in which the wage is fixed in a state of uncertainty about future levels of demand and productivity the objective of the authorities is to minimise the divergence of output from its full information equilibrium level if labour supply is inelastic then it turns out that maintaining the level of nominal income is actually the optimal policy if labour supply is elastic nominal income targetry provides an optimal response to demand is lm shocks but a suboptimal response to productivity shocks however a sufficient condition for a nominal income target to be preferable to a fixed money supply target is that the price elasticity of aggregate demand be less than unity the paper concludes by examining the implications of pursuing target growth rates rather than levels it should be conceded at the outset that there are several pertinent issues not addressed such as the greater comprehensibility of nominal income targets to private agents or the possibility that nominal income targets may leave the authorities with too much discretion e g poole i980 the issue of labour market reform is also ignored this is an enormous subject which it would be impossible to do justice to here see for instance meade s own analysis of the problem in meade i982 such reforms might be expected to affect the parameters of the model nevertheless since changes in labour market practices are neither a precondition for nor a logical consequence of nominal income targets an independent analysis of the macrceconomic implications of the latter is still highly relevant

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

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

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

monetary nominal income and exchange rate targets in a small open economy abstract in this paper i examine the properties of monetary nominal income and exchange rate targets as stabilization policies in an open economy perfect capital mobility and a wide variety of transitory random shocks is assumed nominal wages are assumed to have been set in advance of the realization of the shocks none of these rules is in general sufficient to minimize the welfare cost of aggregate fluctations and none necessarily dominates all others under the assumption that monetary control is subject to random errors optimal policy implies reactions to all observable shocks and is characterized by heavy exchange market intervention

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

playing with the band dynamic effects of target zones in an open economy this paper applies techniques of regulated brownian motion to a model of a small open economy to investigate how bands on fundamental driving variables affect the realization of the nominal exchange rate the real exchange rate prices and output the author shows that these bands mitigate the relationship between exogenous fundamentals and endogenous variables through their effects on expectations he also considers the effects of changing the width of the band and finds greater stabilization of endogenous variables with more narrow bands on exogenous fundamentals copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

intramarginal interventions bands and the pattern of ems exchange rate distributions the authors document an empirical puzzle for european monetary system exchange rates during a period in which the bands on these exchanges rates were almost credible i e exchange rate distributions are hump shaped rather than u shaped as predicted by the standard target zone model the authors offer an explanation of this puzzle that is based on the combination of two realistic features namely the presence of intramarginal interventions and wage price sluggishness

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

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

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 rate rules and macroeconomic stability this paper discusses exchange rate rules in their role as macroeconomic instruments we abstract throughout from the trend part of exchange rate behaviour a crawling peg necessitated by differences in trend inflation and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices

financial development economic growth and banking sector controls evidence from india this paper uses newly collected data from the reserve bank of india to examine the effects of various types of banking sector controls on the process of financial deepening with the exception of a lending rate ceiling these controls are found to influence financial deepening negatively independently of the well known effect of the real interest rate exogeneity tests suggest that financial deepening and economic growth are jointly determined thus policies which affect financial deepening may also have an influence on economic growth the role of banking sector controls in the process of economic development has received considerable attention in the literature the traditional approach due to mckinnon i973 and shaw i973 postulates that government intervention in the pricing and allocation of loanable funds dubbed financial repression inhibits financial development by depressing real interest rates see

monetary and real shocks and the optimal target zone abstract an exchange rate target zone is analysed in a model where the economy is disturbed by shocks to money demand and goods demand the stabilising properties of a target zone are compared to those of fixed and flexible exchange rate regimes it is found that a target zone offers a compromise between these two extremes it is also shown that when there are shocks to both money and goods demand a target zone is better than either a fixed rate or a floating rate in the sense that it minimises the variance of output and prices

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