indirect currency substitution a structural approach abstract previous empirical tests of mckinnon s indirect currency substitution ics hypothesis based on macro reduced form models yield ambiguous results because evidence cannot discriminate ics from competing non monetary models this note suggests a structural model based on the money demand function preliminary evidence supports mckinnon s hypothesis for the federal republic of germany switzerland canada and the netherlands but not for the u s

global liquidity through the lens of monetary aggregates this paper examines how the financial activities of non financial corporations nfcs in international markets potentially affects domestic monetary aggregates and financial conditions monetary aggregates reflect in part the activities of nfcs who channel capital market financing into the domestic banking system thereby influencing funding conditions and credit availability periods of capital inflows are also those when the domestic currency is appreciating and such periods of rapid exchange rate appreciation coincide with increases in the central bank s foreign exchange reserves increasing the stock of narrow money the paper examines economic significance of cross country panel data on monetary aggregates and other measures of non core bank liabilities non core liabilities that reflect the activities of nfcs reflect broad credit conditions and predict global trade and growth

modelling money demand in open economies over the modern floating rate period the role of open economy factors in influencing domestic money demand in major industrial countries over the modern floating rate period is examined the theoretial model for the empirical analysis is derived from a general two country portfolio balance framework that determines the demand for domestic and foreign monetary and non monetary assets in each country the ecm estimates indicate that capital mobility plays an important role in the money demand function in all seven counteries considered currency substitution in contrast is not an important phenomenon

the transactions demand for money in a two currency economy abstract in this paper the model of the transactions demand for money of baumol 1952 is extended to an economy where transactions are conducted in two currencies the currency substitution hypothesis that the domestic demand for domestic money depends on the expected rate of depreciation as well as the domestic rate of interest and level of income is derived from the model in addition several new insights into the implications of currency substitution are provided

strategy proof exchange we consider the allocation of goods in exchange economies with a finite number of agents who may have private information about their preferences in such a setting standard allocation rules such as walrasian equilibria or rational expectations equilibria are not compatible with individual incentives we characterize the set of allocation rules which are incentive compatible or in other words the set of strategy proof social choice functions social choice functions which are strategy proof are those which can be obtained from trading according to a finite number of pre specified proportions the number of proportions which can be accommodated is proportional to the number of agents such rules are necessarily inefficient even in the limit as the economy grows

currency substitution financial innovations and money demand a note this note presents some finnish evidence on the importance of currency substitution and financial innovations for money demand it is also shown that conventional demend for money specifications which do not take these factors into account are clearly misspecified and produced unreasonable results the problem is particularly acute for narrow concepts of money

variability of the japanese money stock links to the u s and the october 1979 policy change abstract mckinnon s currency substitution model predicts that variable u s money growth causes greater variability of foreign money growth contrary to this thesis the variability of japan s monetary targets is found to be inversely related to the variability of u s m1

the variability of inflation a new approach and some new empirical evidence abstract this note tests the variability of inflation using a new simple approach and pooled cross country oecd data 1960 1980 the estimated equation reported shows that the variability of inflation depends upon the variability of money supply over time

priority rules and other asymmetric rationing methods in a rationing problem each agent demands a quantity of a certain commodity and the available resources fall short of total demand a rationing method solves this problem at every level of resources and individual demands we impose three axioms consistency with respect to variations of the set of agents upper composition and lower composition with respect to variations of the available resources in the model where the commodity comes in indivisible units the three axioms characterize the family of priority rules where individual demands are met lexicographically according to an exogeneous ordering of the agents in the more familiar model where the commodity is divisible these three axioms plus scale invariance independence of the measurement unit characterize a rich family of methods it contains exactly three symmetric methods giving equal shares to equal demands these are the familiar proportional uniform gains and uniform losses methods the asymmetric methods in the family partition the agents into priority classes within each class they use either the proportional method or a weighted version of the uniform gains or uniform losses methods

foundations of dynamic monopoly and the coase conjecture subgame perfect equilibria are characterized for a market in which the seller quotes a price each period assume zero costs positive interest rate continuum of buyers and some technical conditions if buyers valuations are positive then equilibrium is unique buyers strategies are stationary and the price sequence is determinant along the equilibrium path but possibly randomized elsewhere otherwise a continuum of stationary equilibria can exist but at most one with analytic strategies coase s conjecture is verified for stationary strategies reducing the period length drives all prices to zero or the least valuation connections to bargaining models are described journal qf economic literature classification

how well does the mundell fleming model fit australian data since the collapse of bretton woods australian time series for the nominal interest rate real output the nominal exchange rate prices and nominal money since 1973 are characterized by a vector autoregressive process driven by five exogenous disturbances those disturbances are identified so that they can be interpreted as the five main sources of fluctuations found in the mundell fleming model of a small open economy under flexible exchange rates namely world interest rate aggregate supply is money supply and money demand shocks the dynamic responses of the estimated model to the structural shocks are analysed and shown to match most of the predictions of the mundell fleming model

monetary integration and currency substitution in the ems the case for a european monetary aggregate abstract this paper examines the phenomenon of cross currency substitution and the validity of monetary aggregation within the european monetary system using non parametric methods which exploit the relationship between intergroup substitution and separability the separability property is tested using the methodology developed by varian the nonparametric approach to demand analysis econometrica 50 945 974 1982 nonparametric tests of consumer behaviour review of economic studies 51 99 110 1983 and is violated in the case of most european countries suggesting that the hypothesis of zero currency substitution which forms the basis of national monetary aggregation should be rejected the results do however validate the use of monetary aggregates for the ems as a whole and i use a standard parametric demand for money approach to compare the performance of an ems divisia index with that of simple sum aggregates during the 1980s and 1990s

nash in nash tariff bargaining abstract we provide an equilibrium analysis of the efficiency properties of simultaneous bilateral tariff negotiations in a three country model of international trade we consider the setting in which discriminatory tariffs are allowed and we utilize the nash in nash solution concept of horn and wolinsky 1988 we allow for a general family of political economic country welfare functions and assess efficiency relative to these welfare functions we establish a sense in which the resulting tariffs are inefficient and too low so that excessive liberalization occurs from the perspective of the three countries

the financial structure and the demand for money in thailand this paper uses recently developed econometric techniques to investigate the demand for money in thailand initial estimates show the absence of any long term unique relationship among a monetary aggregate m1 or m2 an income and a price variable however the introduction of an exchange rate in the above relationship shows the presence of a cointegrating relationship this provides some support to mckinnon s hypothesis of currency substitution it also raises some concern about the closed economy focus of earlier studies on money demand in thailand addition of a foreign interest variable to the above models provide some support to the capital mobility hypothesis the long run elasticity estimates for the m1 equation raise some doubts about the desirability of using this monetary aggregate as an intermediate target by the bank of thailand the null hypothesis of a unit income elasticity and zero foreign interest elasticity are not rejected but the hypothesis of price homogeneity is rejected moreover

international currency substitution and the income velocity of money abstract this paper presents new empirical evidence on the degree to which international currency substitution destabilizes domestic money demand it also provides an explanation of some apparent discrepancies among previous empirical studies of currency substitution this explanation hinges on the distinction between the elasticity of currency substitution and the cross elasticity of money demand a large small value of one elasticity does not imply a large small value of the other a large cross elasticity is required for currency substitution to destabilize domestic money demand the empirical evidence presented here is consistent with the view that these cross elasticities are typically small

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

impact of macroeconomic policies upon agricultural trade and international agricultural development international commodity markets in the early 1980s have experienced a severe cyclical downturn high real rates of interest have discouraged stock holding and disinflation has caused asset market participants to shift out of commodities into financial assets this is only the most recent bout of turbulence since we passed from the stable bliss of the 1950s and 1960s the basic question is whether this instability results from a seemingly unending series of shocks or is there a more general basic explanation which transcends individual events

the effect of excessively elastic expectations on exchange rate volatility in the dornbusch overshooting model abstract bilson has described the empirical finding that the forward exchange rate overestimates the speed of return to equilibrium as a finding of excessive speculation and has drawn implications for the volatility of the exchange rate the present paper pursues this tack within the sticky price monetary model made famous by dornbusch it is shown theoretically that if the market overestimates the speed of adjustment the degree of overshooting is reduced in this sense excessive speculation leads to reduced volatility

new evidence on the fed s productivity in providing payments services abstract as the dominant provider of payments services the efficiency with which the federal reserve provides such services is an important public policy issue this paper examines the productivity of federal reserve check processing offices during 1980 1999 using non parametric estimation methods and newly developed methods for non parametric inference and hypothesis testing the results support prior studies that found little initial improvement in the fed s efficiency with the imposition of pricing for federal reserve services in 1982 however we find that median productivity improved substantially during the 1990s and the dispersion of productivity across fed offices declined

the effects of foreign exchange risk and return on the demand for domestic balances abstract this paper provides an empirical evidence regarding the effects of foreign exchange risk and return on the demand for domestic balances unlike earlier studies which examine only one effect and thus may have been subjected to a misspecification problem this paper includes both foreign exchange risk and return as explanatory variables in the money demand equation the results lend limited support to the hypothesis that foreign exchange risk negatively affects money demand and strongly indicate that foreign exchange return has a negative effect on the demand for domestic balances thus currency substitution seems to be relevant not just in developed economies but in developing economies subject to foreign exchange controls as well

influences of international factors on us prices a theoretical and empirical analysis employing an open economy framework the present article argues that international forces would have important implications for us price behaviour even prior to the 1970s when the us international sector was relatively small a distributed lag price equation that declineates between domestic and foreign impulses is derived the model is estimated using quarterly data over the 1959 1979 period when international reserves as a measure of world liquidty were subject to relatively little noise the study finds that growths of us import prices and exports positively affected us price inflation over the entire sample period but not during pre 1971 period on the other hand while world liquidity measured by worldwide international reserves did not appear to influence us price for the whole period examined its effect is found to be positive over the fixed exchange rate era the mean lag of this foreign impulse is estimated at 6 quarters 2 quarters larger than that of domestic liquidity as measured by m1 th

money and inflation the case of western developed countries 1960 80 1990 money and inflation the case of western developed countries 1960 80 applied economics vol 22 no 7 pp 863 869

the international convergence of inflation rates during fixed and floating exchange rate regimes abstract according to the assets approach to the balance of payments exchange rate under a fixed exchange rate regime inflation must grow at the same rate in each of the participating countries at least in the long run the model implies that reserve currency inflation causes world inflation the mechanism by which inflation is transmitted when currencies are allowed to float is more complex the long run international convergence of inflation is studied using modern time series techniques on post war data from the g 7 countries the evidence on the convergence of inflation during the fixed regime portion of the sample is strong and consistent with the notion of reserve currency causality i e from the us to the rest of the world the evidence of convergence over the floating portion of the sample is also quite strong but no single currency can be characterized as the common underlying source of world inflation implying the inflation rates are endogenous

protecting capital from itself u s attempts to regulate the eurocurrency system in 1979 and 1980 the u s government attempted to regulate the eurocurrency system in order to stabilize the international monetary and financial systems and for u s domestic monetary purposes the conflict between the u s government especially the treasury department and the federal reserve board and u s based transnational banks tnbs illustrates tnbs contradictory interests which are neither self evident nor easily discernible even to tnbs themselves the state comes to play a mediating role vis a vis tnbs in an only partially successful attempt to transform contradictory interests into coherent policy resulting in conflict between the state and tnbs the origins of u s regulatory initiatives are rooted in multilateral attempts to supervise banks between 1974 and 1978 and the failure of such coordination during the 1978 dollar crisis from the conflict between u s officials and u s tnbs emerge varying concepts of tnbs interests after examining the reasons for the failure of the u s proposals i conclude by suggesting some implications of tnbs contradictory interests for statist and social conflict theories of the advanced capitalist state few theories of the state have adequately taken into account the complexity and contradictory interests of transnational capital

currency substitution and speculative attacks on a currency board system abstract a currency board arrangement cba is supposed to be robust against attacks currency substitution complicates life with controversial implications for floating versus fixed exchange rate regimes after reporting evidence of currency substitution in hong kong a monetary model incorporating currency substitution is used to estimate the shadow exchange rate and the probability of speculative attack on the hong kong dollar a decomposition analysis of a markov switching model indicates that the no attack regime was the most durable one this implies that hong kong s quasi cba was relatively robust against both speculative attacks and currency substitution

multilateral trade bargaining and dominant strategies motivated by general agreement on tariffs and trade bargaining behavior and renegotiation rules we construct a three country two good general equilibrium model of trade and examine multilateral tariff bargaining under the constraints of nondiscrimination and multilateral reciprocity for a general representation of government preferences we identify the bargaining outcomes that can be achieved using dominant strategy proposals for all countries in our analysis dominant strategy outcomes emerge when tariff proposals are followed by multilateral rebalancing the resulting bargaining outcome is efficient relative to government preferences if and only if the initial tariff vector positions the initial world price at its politically optimal level

multilateral trade negotiations bilateral opportunism and the rules of gatt wto abstract trade negotiations occur through time and between the governments of many countries an important issue is thus whether the value of concessions that a government wins in a current negotiation may be eroded in a future bilateral negotiation to which it is not party we identify rules of negotiation that serve to protect the welfare of governments that are not participating in the bilateral negotiation our main finding is that the two central principles of gatt wto nondiscrimination mfn and reciprocity preserve the welfare of nonparticipating governments and therefore offer a first line of defense against bilateral opportunism

currency substitution foreign inflation and terms of trade dynamics this paper incorporates rational expectations full price flexibility and currency substitution into the usual small economy model taking explicit account of inflation abroad not only will the steady state terms of trade be affected by an increase in the rate of monetary expansion when the inflation rate abroad is assumed to be nonzero but its dynamic path may also be different from the usual case in which inflation abroad is ignored it has been shown that if the import demands are relatively inelastic the terms of trade will undershoot their equilibrium value if the import demands are elastic the terms of trade will overshoot the key to these diametrically opposite results is the degree of ultimate deterioration in the terms of trade which in turn turn on the size of the two import demand elasticities

international monetary flows and stability in foreign exchange markets 1988 international monetary flows and stability in foreign exchange markets applied economics vol 20 no 5 pp 611 622

the rules of the game international money in historical perspective no world central bank issues a separate currency for commerce across national boundaries instead a system of national monies works more or less well in providing a medium of exchange and unit of account for current international transactions as well as a store of value and standard of deferred payment for longer term borrowing and lending how do national governments and banking institutions interact to provide international money for merchants and investors by necessity this monetary interaction changes with time place political circumstances and financial technology to better understand its historical evolution let us follow robert mundell and distinguish between a monetary system and a monetary order

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

evaluating the empirical evidence for currency substitution a case study of the demand for sterling in europe currency substitution has important implications for the cost of european monetary union if it is significant it will help to reduce costs of convergence to a single currency this paper informs the policy debate by testing for its existence on a consistent european database making use of cointegration methods the results demonstrate that in the two types of models tested there is no clear evidence of currency substitution in either the short or the long run and that therefore currency substitution between sterling and ec currencies cannot be relied upon as a mechanism or an aid to reduce the costs of monetary convergence copyright 1994 by royal economic society

the impact of international factors on u s inflation an empirical test of the currency substitution hypothesis a common argument for flexible exchange rates is that they insulate the domestic economy from external monetary shocks consequently the domestic rate of inflation and income growth are related directly to the behavior of the domestic money supply the insular properties of a flexible exchange rate system have been challenged over the past few years by proponents of the theory of currency substitution advocates of currency substitution argue that the domestic demand for money is a function of the relative opportunity costs between domestic and foreign holdings of monetary assets failing to recognize these international influences yields a domestic money demand function that appears to be highly unstable consequently depending on the particular set of international forces affecting the domestic demand for money a given rate of domestic money growth can lead to a variety of rates of domestic inflation

currency substitution capital mobility and money demand abstract this paper re examines the currency substitution cs issue by specifying a general portfolio balance pb model where domestic residents demand for foreign money is distinguished from their demands for foreign non monetary assets the latter possibility which reflects international capital mobility as opposed to cs per se is already a key feature in the open economy macro literature the inclusion of foreign money leaves the usual asset demand functions unchanged in the pb model that ignores cs at least as far as the appropriate rate of return arguments and their signs are concerned although this suggests that cs is of limited importance in macro modelling it implication for the estimation of money demand functions is pursued an initial attempt is made to empirically isolate the separate efects of high capital mobility and currency substitution for canada germany the united kingdom and the united states the results while not conclusive due to high multicollinearity problems bring into question the empirical as well as the theoretical relevance of currency substitution

international influences on the u s economy summary of an exchange in currency substitution and instability in the world dollar standard 1982 ronald mckinnon hypothesized that shifts in international portfolio preferences for dollar assets including bonds destabilized the effective demand for money in the united states from the dollar depreciation of 1971 73 to the great dollar appreciation of 1981 83 these demand shifts were telegraphed by large changes in the dollar exchange rate against other hard currencies they signaled sudden inflation in the united states when the dollar was unexpectedly weak and deflation when the dollar became strong in addition mckinnon argued this ebb and flow in the demand for dollar assets provoked foreign central banks but not the u s federal reserve system to adjust their money growth rates to mitigate these exchange fluctuations consequently since 1970 annual percentage growth in world mi the sum of percentage growths in dollars marks yen sterling and so on fluctuated more than annual money growth in the united states the resulting international business cycle had a first order impact on american income and prices other than discussing some suggestive money and price data for ten industrial countries mckinnon provided no formal econometric testing of his theory this note summarizes an exchange between mckinnon and tan m t and radcliffe warga and willett r w w prompted by the latter s 1984 econometric test of mckinnon s hypothesis copies of the full exchange including new econometric work are available from the authors consider the single equation econometric technique of explaining u s prices or incomes by current or lagged changes in u s ml all authors agree that there was a significant deterioration in the fit of this basic monetary equation from the fixed exchange rate period of 1958 69 to the era of floating rates from 1972 to 1982 by itself american money growth now gives a less satisfactory explanation of cyclical fluctuations in nominal income or prices but how can changing international asset preferences be represented statistically in a mixed exchange rate regime of dirty floating one proxy variable is money growth in the rest of the industrial world mlrow mckinnon 1982 originally hypothesized that world money inclusive of mlrow has a stronger impact on american prices than u s money by itself but this conjecture turns out to be true only for american and world tradable goods prices as approximated by the wholesale price index wpi see mckinnon tan 1983 radcliffe warga and willett correctly pointed out that the influence of mlrow is not helpful in predicting changes in u s nominal gnp myles wallace 1983 showed that domestic price indices such as the american cpi or gnp deflator which have large nontradable components are not well explained by world money r w w s objection is important because monetary variables

currency substitution and nonlinear error correction in taiwan s demand for broad money we modify the conventional money demand function by including a real exchange rate variable to reflect the effect of currency substitution empirical evidence indicates that the variable is crucial to the long run stability of taiwan s money demand after finding the failure of a linear error correction model ecm in describing the dynamics of taiwan s money demand we apply a nonlinear ecm to examine its dynamics and support the appropriateness of the nonlinear model empirically

another visit to the cagan model of money demand the latest russian experience abstract this paper investigates empirically the cagan style money demand function for russia during the recent hyperinflation era 1992 1994 using the johansen multivariate cointegration test results indicate that rate of change of exchange rate currency depreciation is required in the demand function for real m2 and real currency in order to obtain a stationary long run relationship error correction model results show that there exists a bidirectional causality between real money balances and determinants of real money demand including currency depreciation exchange rate sensitivity of the demand for money indicates currency substitution

alternative measures of the federal reserve banks cost of equity capital abstract the monetary control act of 1980 requires the federal reserve system to provide payment services to depository institutions through the 12 federal reserve banks at prices that fully reflect the costs a private sector provider would incur including a cost of equity capital coe although fama and french fama e f french k r 1997 industry costs of equity journal of financial economics 43 153 193 conclude that coe estimates are woefully and unavoidably imprecise the reserve banks require such an estimate every year we examine several coe estimates based on the capm model and compare them using econometric and materiality criteria our results suggest that the benchmark capm model applied to a large peer group of competing firms provides a coe estimate that is not clearly improved upon by using a narrow peer group introducing additional factors into the model or taking account of additional firm level data such as leverage and line of business concentration thus a standard implementation of the benchmark capm model provides a reasonable coe estimate which is needed to impute costs and set prices for the reserve banks payments business

cointegration tests of a long run relation between money demand and the effective exchange rate abstract for the period starting with the floating of the us dollar we find evidence that long run stationarity of the demand function for m2 but not m1 requires inclusion of the effective exchange rate these results lend some support to mckinnon s hypothesis that nonstationarity in the demand for money can be resolved by inclusion of the exchange rate jel f41 e41

currency substitution and economic monetary aggregates abstract existing analyses of currency substitution rely on the assumption that domestic monetary assets are perfect substitutes for each other the present paper examines empirically the currency substitution hypothesis using divisia monetary aggregates which relax the perfect substitutability assumption used in earlier work the empirical results support the hypothesis of currency substitution for the united states

arbitrage pricing theory and utility stock returns this paper presents some new evidence that arbitrage pricing theory may lead to different and better estimates of expected return than the capital asset pricing model particularly in the case of utility stock returns results for monthly portfolio returns for 1971 1979 lead to the conclusion that regulators should not adopt the single factor risk approach of the capm as the principal measure of risk but give greater weight to apt whose multiple factors provide a better indication of asset risk and a better estimate of expected return notwithstanding initial skepticism and recent challenges the capital asset pricing model capm has been used to develop project screening rates value companies measure the impact of policy change on risk and construct portfolios recently the federal energy regulatory commission ferc proposed it as the principal measure of risk for the electric utilities it regulates it would be ironic for acceptance of capm by policymakers to occur just as arbitrage pricing theory apt threatens to replace it as an explanation of the relationship between return and risk and it would be a pity if ferc were to adopt the single risk factor approach of capm when it could be demonstrated that the multiple factors of apt provide a better indication of asset risk and a better estimate of expected return this paper presents some new evidence that apt may lead to different and better estimates of expected return than capm and that it may be more helpful to policymakers as a result we describe capm and apt note work done by others show how estimates of required returns for utilities developed by applying each model may differ and finally report the evidence that convinces us that if one model is to be relied upon for policy purposes apt would be the better choice

erratum to multilateral trade negotiations bilateral opportunism and the rules of gatt wto abstract trade negotiations occur through time and between the governments of many countries an important issue is thus whether the value of concessions that a government wins in a current negotiation may be eroded in a future bilateral negotiation to which it is not party we identify rules of negotiation that serve to protect the welfare of governments that are not participating in the bilateral negotiation our main finding is that the two central principles of gatt wto nondiscrimination mfn and reciprocity preserve the welfare of nonparticipating governments and therefore offer a first line of defense against bilateral opportunism

currency substitution and the precautionary demand for money abstract although the implications of currency substitution have received considerable attention recently the microeconomic foundations of this phenomenon seem largely to have been taken for granted the present paper considers the precautionary motive for holding cash balances as one possible motivation for the currency substitution hypothesis a three asset model is presented in which transaction costs are explicit and an agent is faced with uncertain cash requirements in two different currencies the role played by the expected rate of depreciation in the optimal portfolio allocation is found to conform with prior beliefs

portfolio theory and currency substitution one of the major reasons friedman 1953 and johnson 1972 advocated flexible exchange rates was to eliminate supply side monetary substitutability which can incapacitate domestic monetary policy however contributors to the currency substitution literature including miles 1978 girton and roper 1981 and mckinnon 1982 have argued that when economic agents hold both domestic and foreign monies variations in foreign interest rates or expected future exchange rates can make domestic money demand functions unstable as economic agents shift resources in response to changes in prospective relative returns as a result they and others have claimed that flexible exchange rates may not secure domestic monetary autonomy l the major purpose of this paper is to demonstrate the conditions under which foreign and domestic monies are substitutes in demand when economic agents have motives to hold both and to contrast the determinants of currency substitutability with those of the more general concept of asset substitutability importantly it is demonstrated that the usual portfolio theoretic justification for including opportunity cost variables such as foreign interest rates foreign inflation rates or expected