bluuebunny/crossref_metadata_2025 huggingface dataset:
The Modern Theory of Forward Foreign Exchange: Some New Consistent Estimates Under Rational Expectations
Authors: Glaessner Thomas C.
Published: August 2019

In recent papers, B.T. McCallum and P. Callier have estimated an equation implied by the modern theory of forward foreign exchange, assuming that expectations about future spot exchange rates are formed rationally. Their estimates of the equation are subject to several problems that may arise when estimating rational expectation models. First, the presence of the expectation of the guture value of a variable conditional on information available at time t, within the equation being estimated, has been found to elad to serial correlation in the error term. Second, the use of standard GLS techniques to correct for serial correlation in the structural disturbance will lead to inconsistent parameter estimates and to inconsistent asymptotic standard errors. Third, the use of monthly data on all series in conjunction with forward contracts of three months maturity results in successive forecast periods overlapping and attendant complications in estimation. Finally the possibility that the disturbance term in the MT equation is not conditionally homoskedasit can cause teh standard covariane matric estimators to be incosistent.
The Behavior of Monetary Aggregates in Major Industrialized Countries
Authors: Howard David H. , Johnson Karen
Published: August 2019

In this paper, recent monetary growth in the United States, Japan, Germany, the United Kingdom, Canada, and Switzerland is examined. The implications of the general pattern of divergent monetary growth rates are then discussed. Perhaps the two most dramatic instances of divergent monetary growth in recent years occured in the United Kingdom and Switzerland. The U.K. and Swiss cases are particularly interesting because these two countries have taken their monetary growth targets quite seriuosly in recent years, and because in the U.K. case the targeted aggregate was teh one showing bouyant growth. In this paper, disaggregated demand for money funcions derived in detail the U.K. and Swiss experiences. It is concluded that although the behavior of interest rates played an important role in the determination of the path of the monetary aggregates in the United Kingdom and Switzerland, several other factors also were operating. The disaggregated demand functions, by allowing differential adjustment speeds, impact effects, and structural shifts, enable the analyst to assess more accurately the forces at work during recent years.
Payments Systems: Theory and Policy
Authors: Frankel Allen B. , Marquardt Jeffrey C.
Published: August 2019

The goal of this paper is to provide a simplified financial framework for examining a number of theoretical and policy issues raised by the existence and operation of interbank payments arragements. To this end, payments arrangements are assumed to be embedded in an exogenous, real sector. The organization of payments activities, including their risks, is examined under increasingly general assumptions about the process of transferring payment from one agent in the nonbank sector to another. The most general framework presented in this paper consists of a multibank economy with trade and bank credit. The framework developed is inteded for the analysis of payments arrangements in which transactions costs, information costs, and capital market imperfections significantly affect behavior.
Capital Accumulation and Foreign Investment Taxation
Authors: Sibert Anne C.
Published: August 2019

This paper provides a general equilibrium model of capital accumulation in open economies. Capital movements between countries result from difference in endowments. The paths over time of wages, interest rates, and capital-labor ratios under autarky and laissez-faire are compared, and the effect of restricting capital mobility by foreign investment taxation is discussed.
What's Wrong with Empirical Exchange Rate Models: Some Critical Issues and New Directions
Authors: Isard Peter
Published: August 2019

A number of recent statisitcal studies have found that "representative" structural exchange rate models are no more accurate than forward rates or random walks in forecasting out-of-sample, even when purged of erros in forecasting explanatory variables. This paper discusses some deficiencies in the specification and estimation of structural exchange rate models. The criticism is organized into three basic themes, which are developed in sections III-V after section II provides a brief review of some major issues and classes of models in the literature. Section III suggests that empirical exchange rate models have essentially put a lot of eggs into one basket in their attempts to capture the behavior of inflation expectations, and the new directions for modelling or measuring inflation expectations should be pursued. Section IV argues that portfolio balance models have been oversimplified: insufficient attention has been paid to microeconomic evidence on how large exchange market paricipants (banks and corporations) perceive their portfolio-management objectives and structure their portfolio-adjustment decision processes; and conceptual models have distinguished portfolio assets mainly by currency, without adequately linking the prospective yields on assets to country-specific variables such as stabilization policies and macroeconomic outlooks, taxes, capital controls, creditworthiness, etc. Section V argues, however, that despite the deficiencies in the specifications of structural exchange rate models, the poor empirical performance of these models may stem much less from structural shortcomings than from deficiencies in quantifying ex ante expectations of explanatory variables, which are critical for testing structural models in a "news" framework.
A Strategy To Resolve Mexico's Liquidity Crisis
Authors: Maroni Yves
Published: August 2019

A discussionof the strategy to resolve Mexico's liquidity crisis must start with an analysis of the origins of the crisis and a review of its principal phases. An understanding of what went wrong and of the emergency actions that followed and that are now history will shed valuable light on the problem and provide useful insight for the formulation of an appropriate strategy for the coming years.
Exchange Rate Determination and Real Interest Rate Differentials Under Uncertainty
Authors: Lapan Harvey E.
Published: August 2019

The extent to which economic agents consider domestic and foreign assets to be perfect substitutes is of fundamental importance to the conduct of monetary and fiscal policy. Under fixed exchange rates, it is well known that if assets are considered perfect substitutes, then moentary policy will be impotent for a small country, whereas for a larger country monetary policy will have (essentially) the same effect in all countries, regardless of which country initiates the change in policy. Comparably, under a flexibly exchange rate regime, sterilized intervention to stabilize (or, simply, alter) exchange rates will be useless, since asset holders view the foriegn and domestiv assets as being equilvalent. Furthermore, government deficits (due, for example, to real absorption by the government) will leave exchange rates (and forward rates) unaltered, provided none of the deficit is monetized.
Federal Taxation and the Domestic-Foreign Asset Choice of a U.S. Bank
Authors: Frankel Allen B.
Published: August 2019

This paper develops a simple model of US bank taxation which empasises the influence of tax rules on banks' portfolio choices among domestic and foreign assets. it is a thesis of the paper that US tax policy for banks provides part of the explanation of the "why" of the large credit exposures of US banks in the developing countries. This contribution encompasses not only the response of banks to the tax-based financial incentives but also the perception of banks that the tax-based financial incentives but also the perception of banks that the tax rules were meant to be interpreted as signals of the general US public policy stance favouring bank financing of the developing countries' external borrowing requirements.
International Reprecussions of the U.S. Budget Deficit
Authors: Hooper Peter
Published: August 2019

The purpose of this paper is to provide a quantiative assessment of the international repercussions of the U.S. fiscal policy changes that have taken place since 1981. The policy changes include changes in the lax laws, embodied in the Economic Recovery Tax Act of 1981 and the Tax Equity and Fiscal Responsibility Act of 1982, and changes in defense and nondefense spending. The analysis is undertaken with the Federal Reeserve Board staff's Mulicountry Model (MCM). It focuses on the relatively short-run (3-4 year) demand-side effects of these fiscal policy changes, partly because of MCM is best suited for analysis over the horizon, and partly because much of the debate to date has cenetered on these effects. The longer-run supply-side implications are not addressed, largely because of the difficulties involved in capturing these effects in the model.
The International Transmission of Oil Price Effects and OPEC's Pricing Policy
Authors: Marquez Jaime R.
Published: August 2019

Analysis of oil-price effects generally maintain the assumption that oil-importers can be treated as small economies, which allows oil-price changes to be treated as exogenously set by OPEC. Analyses of oil-price determination rely on the assumption that the demand for oil is a stable function, which implies that real income of oil importers is unaffected by oil-price changes. Our analysis treats oil prices and economic activity as jointly determined. The effects of exogenous oil-price changes are studied in a simple theoretical world model. Hotelling's analysis is generalized to allow for both oil-price feedback effects and stabilization policies.
Simulating Exchange Rate Shocks in the MPS and MCM Models: An Evaluation
Authors: Kling Arnold S.
Published: August 2019

In 1983 and 1984, the United States economy staged a vigorous economic recovery at a time when the value of the dollar was high and rising, leading to a steady deterioration of the trade balance. The strength of both the economy and the dollar exceeded most forecasts. This raises a question: are there expansionary effects from a currency appreciation that are overlooked when we focus solely on the trade balance?The purpose of this paper is to try and resolve the issue of whether or not an appreciation of the dollar is expansionary. To do so, I evaluate the simulation properties of the MPS and MCM models. As part of this evaluation, I develop a "back-of-the-envelope" model to serve as a third alternative against which to compare the two large econometric models.
Anticipatory Capital Flows and the Behavior of the Dollar
Authors: Kling Arnold S.
Published: August 2019

In this paper, I argue that the value of the dollar is influenced by the "state of long-term expectation" and that market expectations do not appear to embody a return to steady state. I suggest that the recent strength of investment in the United States reflects "animal spirits" and those investors appear to expect the investment boom to he sustained indefinitely. Finally, I show how an adverse shift in perceptions concerning the profitability of investment, by altering this state of expectations and thereby affecting international capital flows, conceivably could put upward pressure on interest rates that would outweigh the downward pressure coming from the actual slowdown in investment.
Money Demand in Open Economies: A Currency Substitution Model for Venezuela
Authors: Marquez Jaime R.
Published: August 2019

This paper investigates the extent to which domestic money balances in Venezuela are influenced by foreign exchange considerations. To this end, individuals are assumed to choose the levels of foreign and domestic money that minimize the borrowing costs associated with a given level of monetary services. The solution to this optimization problem yields a closed form domestic money demand function. This specification is estimated and the results point to an elasticity of currency substitution in excess of one. Conditioned on these estimates, the paper presents estimates of the out-of-sample exchange-rate risk for the period 1981-1982, prior to the collapse of the fixed exchange rate system in 1983.
Optimal Currency Basket in a World of Generalized Floating an Application to the Nordic Countries
Authors: Edison Hali J. , Vardal Erling
Published: August 2019

The purpose of this paper is to derive optimal weights for a currency basket taking into consideration the objective of the policymaker. We carefully distinguish between the two terms: effective exchange rate index and currency basket, which are often used interchangeably in the literature. In general, our analysis is an extension of the work of Branson-Katseli and Lipschitz-Sundararajan and then applied to the Nordic countries. We use the policy objective of minimizing fluctuation in export production and illustrate our results using Norway, Sweden and Finland. The weights we derive create optimal currency baskets which are different from the ones used in the countries.
Expected Fiscal Policy and the Recession of 1982
Authors: Branson William H. , Fraga Arminio , Johnson Robert A.
Published: August 2019

The Economic Recovery Tax Act of 1981 had one aspect that is unusually useful for economic analysis. It provided an example of a clear-cut announcement of future policy actions at specified dates. This provides an opportunity to apply recent advances in the analysis of expectations dynamics to data that have been generated in an environment that includes such anticipated policy action.
International Comparisons of Fiscal Policy: The OECD and the IMF Measures of Fiscal Impulse
Authors: Schinasi Garry J.
Published: August 2019

Both the OECD and the IMF periodically estimate and publish measures of fiscal impulse to gauge the extent to which fiscal policy in the major industrial countries has become more or less expansive over time. This paper compares these measures analytically and numerically. The paper shows that the OECD and IMF measures of fiscal impulse differ in at least four fundamental ways: (1) the OECD includes fiscal drag under the presumption that it is part of the "structure" of fiscal policy, while the IMF excludes it from its adjusted measure of the budget balance; (2) the OECD and the IMF both adjust for cyclical factors but they do so differently; (3) the OECD estimates its marginal tax and expenditure rates from a structural model whereas the IMF assumes unit income-elasticity of its parameters and uses historical average tax and spending rates; and (4) each agency uses different estimates of potential output. The paper then numerically allocates differences in the published figures of the OECD and the IMF to these various sources. The paper assesses the usefulness of each measure.
Post-Stimulation Analysis of Monte Carlo Experiments: Interpreting Pesaran's (1974) Study of Non-Nested Hypothesis Test Statistics
Authors: Ericsson Neil R.
Published: August 2019

"Monte Carlo experimentation in econometrics helps 'solve' deterministic problems by simulating stochastic analogues in which the analytical unknowns are reformulated as parameters to be estimated." (Hendry (1980) With that in mind, Monte Carlo studies may be divided operationally into three phases: design, simulation, and post-simulation analysis. This paper provides a guide to the last of those three, post-simulation analysis, given the design and simulation of a Monte Carlo study, and uses Pesaran's (1974) study of statistics for testing non-nested hypotheses to illustrate the techniques described. A statistic is derived for testing for significant deviations between the asymptotic and (observed) finite sample properties. Further, that statistic provides the basis for analyzing discrepancies between the finite sample and asymptotic properties using response surfaces. The results for Pesaran's study indicate the value of asymptotic theory in interpreting finite sample properties and certain limitations for doing so. Finally, a method is proposed for adjusting the finite sample sizes of different test statistics so that comparisons of their power may be made. Extensions to other finite sample properties are indicated.
Taxation of Capital Gains on Foreign Exchange Transactions and the Non-Neutrality of Changes in Anticipated Inflation
Authors: Schinasi Garry J.
Published: August 2019

In a two-country world with perfect capital markets and no taxes, the existence of purchasing power parity is fully consistent with interest party and the equalization of real interest rates across countries. In such a world, changes in anticipated inflation in either country will not alter the world equilibrium real interest rate. If asset returns are taxed, the existence of taxes may drive a wedge between real after-tax interest rates, and changes in anticipated inflation may create arbitrage opportunities, thereby creating capital flows between countries and thereby altering equilibrium interest-rate differentials.The purpose of this paper is twofold. First, the paper demonstrates that the source of the wedge between real rates is not the existence of a tax on interest income (as argued in the literature on this subject) but instead the implicit assumption that capital gains are taxed as if they were interest income. Second, the paper attempts to clarify the conditions under which the basic proposition first argued by Howard and Johnson (1982) holds "exactly" (rather than as an approximation)--the proposition that in a world in which interest income is taxed, both purchasing power parity and equalization of real after-tax interest-rates (or constancy of the real after-tax interest-rate differential) cannot hold simultaneously. Furthermore, cases in which real returns are taxed are also considered.
Are Foreign Exchange Forecasts Rational? New Evidence From Survey Data
Authors: Dominguez Kathryn
Published: August 2019

Tests of rational expectations in foreign exchange markets have been inconclusive because of disagreement over the underlying asset pricing model. This paper uses a newly available set of data on foreign exchange forecasts to examine directly expectations formation in four foreign currency markets. Generally, results do not support the simple rational expectations hypothesis.
Is the ECU an Optimal Currency Basket?
Authors: Edison Hali J.
Published: August 2019

Recently the role of the ECU has increased and there has been concern whether it is sustainable. The first part of this paper examines the composition of the ECU and investigates the impact of changes in this composition on the value of the ECU. The results show that when there is little exchange rate variability among the currencies that comprise the ECU or when the changes in composition are small the value of the ECU remains stable. The second part of this paper constructs an alternative, optimal basket of currencies for Germany and compares this basket to the ECU. The path of the optimal basket resembles the ECU path but is dramatically different from the DM/$.
A Framework for Analyzing the Process of Financial Innovation
Authors: Frankel Allen B. , Mann Catherine L.
Published: August 2019

The following note presents a framework for analyzing financial management techniques and financial product innovation. The framework attempts to illustrate how characteristics of the economic system and its participants motivate financing needs and encourage innovations in financing techniques. New sets of financial contracts are the joint product of (1) changes in technology and in the international macro environment of asset prices; (2) the interplay of individual market participant's existing financial exposures; and (3) the presence of fruitful cross-market arbitrage opportunities based on differing national jurisdictions and structures. We use stylized examples to explore several different manifestations of this process and we offer general observations on how financial innovation may change the character of international money and credit markets. Finally, in thinking about official attitudes toward the process of innovation policies, it is necessary to form a view of the counterfactual world. How would the world economies have functioned without innovation?
Labor Market Rigidities and Unemployment: The Case of Severance Costs
Authors: Gavin Michael K.
Published: August 2019

It is frequently alleged that the persistent, high rates of unemployment in many European countries are due, at least in part, to various labor market rigidities. One of these rigidities is the high cost of firing workers, compared with the cost in the United States, or in Europe in the early 1960s.This paper assesses the empirical importance of severance costs on labor demand. A partial equilibrium model of the firm's employment decision in the presence of significant severance costs is formulated and solved. The theoretical section of the paper identifies the following determinants of the impact of severance costs on labor demand: (1) the size of the required severance payments, (2) the variability and persistence of shocks to labor demand, (3) the expected rate of growth of labor demand, (4) the rate at which workers voluntarily leave the firm to retire or take other jobs, (5) the wage elasticity of labor demand, and (6) the firm's discount rate.The analytical framework is then used to evaluate the impact of severance costs on the expected cost of hiring a worker, and hence on labor demand. These costs are evaluated for a plausible base case, and the sensitivity of the conclusions to alternative assumptions is investigated.
Short-Term and Long-Term Expectations of the Yen/Dollar Exchange Rate: Evidence From Survey Data
Authors: Frankel Jeffrey A. , Froot Kenneth
Published: August 2019

Three surveys of exchange rate expectations allow us to measure directly the expected rates of return on yen versus dollars. Expectations of yen appreciation against the dollar have been (1) consistently large, (2) variable, and (3) greater than the forward premium, implying that investors were willing to accept a lower expected return on dollar assets. At short-term horizons expectations exhibit bandwagon effects, while at longer-term horizons they show the reverse. A 10 percent yen appreciation generates the expectation of a further appreciation of 2.4 percent over the following week, for example, but a depreciation of 3.4 percent over the following year. At any horizon, investors would do better to reduce the absolute magnitude of expected depreciation. The true spot rate process behaves more like a random walk.
The Pricing of Forward Exchange Rates
Authors: Levine Ross
Published: August 2019

This paper addresses the question: do risk premia account for the observed time-varying discrepancies between forward and corresponding future spot exchange rates? A simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model. Using various econometric procedures and different estimation periods, the data reject the restrictions. In contrast to past investigations, the empirical results are inconsistent with a world in which time-varying risk premia are the sole determinants of observed deviations from the unbiased expectations hypothesis. Anticipated real exchange rate movements may explain the rejection.
Debt Conversions: Economic Issues for Heavily Indebted Developing Countries
Authors: Alexander Lewis S.
Published: August 2019

This paper is a general discussion of debt conversions in heavily indebted developing countries. The paper first describes the three different types of transactions that are commonly called debt conversions. Next the paper discusses programs that have been established in Chile, Brazil, Mexico, Argentina, and the Philippines to facilitate these transactions. Then the different ways in which commercial banks can participate in these transactions and the volume of these transactions to date are discussed. The paper concludes with a discussion of a broad range of economic issues raised by these transactions, including: the effect of debt conversions on the structure of debtor countries' external liabilities, the incentives debt conversion programs provide for net new capital inflows, the macroeconomic effects of these transactions, and the new role for debt swaps programs in the so-called "menu-of-options" approach to restructuring developing countries' bank debts.
Monte Carlo Methodology and the Finite Sample Properties of Statistics for Testing Nested and Non-Nested Hypothesis
Authors: Ericsson Neil R.
Published: August 2019

Using recently developed Monte Carlo methodology, this paper investigates the effect of dynamics and simultaneity on the finite sample properties of maximum likelihood and instrumental variables statistics for testing both nested and non-nested hypotheses. Numerical-analytical approximations (response surfaces) to the unknown finite sample size and power functions of those statistics are obtained for dynamic one-and two-equation models. The results illustrate the value of asymptotic theory in interpreting finite sample properties and certain limitations for doing so. Two practical finite sample results arise: the F form of the Wald statistic is strongly favored over its chi-squared form; and the effects of "large-sigma" and a small effective sample size are particularly pronounced for Sargan's (1958) instrumental variables statistic and Ericsson's (1983) Cox-type instrumental variables statistic. Re-examining Pesaran and Deaton's (1978) empirical example illustrates the additional information gained from the instrumental variables statistics.
The Capital Flight "Problem"
Authors: Gordon David B. , Levine Ross
Published: August 2019

This paper isolates the common themes and policy recommendations found in the capital flight literature, and evaluates their statistical, conceptual, and empirical foundations. We find that there is no basis for presuming a stable link between any measure of capital flight and a nation's growth potential or ability to meet external obligations. Thus, although popular measures of capital flight are occasionally indicative of underlying economic and political problems, "capital flight" is not generally useful as a policy target or reliable as a signal of when to intensify or mitigate efforts for policy reforms. Moreover, policies proposed to reduce capital flight and repatriate flight capital may even stymie investment, slow growth, shrink the tax-base, and the lower the country's debt financing capacity.
Adjustment Costs and International Trade Dynamics
Authors: Gagnon Joseph E.
Published: August 2019

This paper develops a model of trader behavior that is characterized by quadra is adjustment costs, imperfect competition, and rational expectations. The model is fitted to data on aggregate trade flows between the United States and three of its largest trading partners. Tests against alternative specifications confirm the importance of imperfect competition and adjustment costs. The hypothesis of rational expectations cannot be rejected. The estimated price elasticities of trade flows are generally in the range reported by previous researchers, but the activity elasticities are significantly higher.
The Timing of Consumer Arrivals in Edgeworth's Duopoly Model
Authors: Dudey Marc
Published: August 2019

In his classic Papers relating to Political Economy (1897), Francis Edgeworth demonstrated that when duopolists have limited productive capacity, there may be no Nash equilibrium in prices. One feature of Edgeworth's model is that consumers are assumed to meet with the duopolists at the same time.This paper analyzes a version of the Edgeworth model in which consumers arrive sequentially instead of simultaneously. This departure from Edgeworth's framework should seem reasonable since there are few markets besides auctions in which buyers all meet with sellers at the same time.The point of the analysis is to show that when sellers engage in quantity constrained price competition, the timing of consumer arrivals may greatly affect the nature of equilibrium. It turns out that the existence of Nash equilibrium in prices may be restored. It also turns out that the duopolists may be able to maximize joint profits!
Interactions Between Domestic and Foreign Investment
Authors: Stevens Guy V. G. , Lipsey Robert E.
Published: August 2019

This paper studies both the domestic and foreign fixed investment expenditures of a sample of U. S. multinational firms. In addition to explaining empirically each type of investment, an important goal is to determine whether there are significant interactions between expenditures in the different locations.Two types of interaction--one, financial, and the other, production-based--are explored theoretically and empirically. The financial interaction is the result of a model which assumes a risk of bankruptcy and its associated costs; under these circumstances, the firm faces an increasing cost of capital as a function of its debt/equity ratio. Domestic and foreign investment will be interdependent, since, in competing for finance, each affects the cost of capital in the other location. Production interactions can arise when, because of start-up costs or other factors that produce nonlinear cost functions, it may become, profitable to shift production from the home to the foreign location.The hypotheses are tested on a unique sample of micro-economic data covering the domestic and foreign operations of seven multinational firms for a period of 16 to 20 years. In general the firm-level investment functions fit reasonably well for both domestic and foreign expenditures. An interdependence between domestic and foreign investment was confirmed frequently through the finance side, but only once via production.
The Dynamics of Uncertainty or the Uncertainty of Dynamics: Stochastic J-Curves
Authors: Marquez Jaime R.
Published: August 2019

This paper characterizes the statistical distribution of the response of the U.S. trade account to a dollar depreciation. To accomplish this task, the paper builds and estimates an econometric model of U.S. bilateral trade. Given an exchange-rate shock, this distribution is generated empirically by stochastically simulating this model using random drawings for both innovations and trade elasticities. The paper finds that the distribution of trade-account responses is not stationary, that its variance is directly related to the size of the exchange-rate shock, that the dominant source of uncertainty lies with imports' price elasticities, and that the dispersion of these responses is more pronounced in the short run than in the long run. Based on these properties, the analysis applies Chebychev's inequality to the sample of trade-account responses and finds that hysteresis in price elasticities has a low probability of accounting for the persistence of the U.S. trade deficit.These findings have two practical implications. First, forecasts of trade-account responses to exchange-rate shocks should include the associated confidence intervals. Uncertainty in these responses is potentially large and omitting the corresponding confidence intervals is analogous to omitting standard errors of regression estimates. Second, deriving confidence intervals needs to recognize that parameter estimates are random variables and that they contribute, quite significantly in this application, to the width of these intervals.
A Long-run View of the European Monetary System
Authors: Edison Hali J. , Fisher Eric
Published: August 2019

This paper analyzes the exchange rates and consumer price indices of the six largest countries of the European Monetary System (EMS). The analysis covers the entire period of floating exchange rates. This paper shows that many of the implied real exchange rates have unit roots, even when one allows for the possibility of a structural break occurring at the time of the formation of the EMS. Further, prices and exchange rates are not co-integrated during the EMS period. There is strong evidence that there is a quadratic time trend in these price indices and weak evidence that Exchange rates and prices were more highly co-integrated before the advent of the EMS. The data suggest that the eleven realignments of the EMS between 1979 and 1988 have not served fully to offset the member countries' inflation differentials.
A Note on "Transfers"
Authors: Gordon David B. , Levine Ross
Published: August 2019

This paper attempts to provide some structure to the analysis and measurement of "net resource transfers." We go about achieving this objective in two steps. First, we use standard measures of portfolio changes and balance of payments statistics to evaluate the real resource transfers associated with financial transactions. Second, we sketch ways in which this analytical framework can be used to address the economic concerns associated with the term "net resource transfers," e.g., questions regarding the "burdens" of international debt obligations and the effects of these obligations on domestic capital formation and debt servicing.
Exact and Approximate Multi-Period Mean-Square Forecast Errors for Dynamic Econometric Models
Authors: Ericsson Neil R. , Marquez Jaime R.
Published: August 2019

Both future disturbances and estimated coefficients contribute to the uncertainty in model-based ex ante forecasts, but only the first source is usually taken into account when calculating confidence intervals for practical applications. Schmidt (1974) and Baillie (1979) provide an easily computable second-order approximation to the mean-square forecast error (MSFE) for linear dynamic systems which recognizes both sources of uncertainty. To assess the accuracy of their approximation, and thus its usefulness, we compare it with three sets of estimates of the exact MSFE for the univariate AR(l) process: Monte Carlo estimates for OLS, analytically based values for OLS, and Monte Carlo estimates for maximum likelihood. We find that the Schmidt-Baillie formula is a good approximation to the exact MSFE, and that it helps explain why the exact MSFE can decrease as the forecast horizon increases. In fact, for dynamics typical to econometric models, the MSFE often has a maximum at a forecast horizon of one to twelve periods, i.e., at horizons that are of principal concern to forecasters and policy makers.
Implications of the U.S. Current Account Deficit
Authors: Howard David H.
Published: August 2019

In 1988, the United States recorded a current account deficit of about $135 billion. The consensus forecast seems to be for little change in the current account in the near term. In this paper, the implications of the U.S. current account deficit and of the consequent buildup in U.S. external debt are examined. The analytical framework for thinking about the U.S. current account is first surveyed, and the results from the empirical literature on the causes of the deficits in the 1980s are then reported. The sustainability of the U.S. external position is discussed next. It is concluded that, at some point, the U.S. trade deficit has to be closed, but that it is conceivable that the U.S. current account balance could remain substantially negative. How the trade gap might be closed is addressed in the final section of the paper.
Savings Rates and Output Variability in Industrial Countries
Authors: Schinasi Garry J. , Gagnon Joseph E.
Published: August 2019

The economics literature offers competing hypotheses about the relationship between savings rates and output variability. This paper examines data for eight industrial countries to determine if there is a discernible pattern between savings rates and cyclical volatility of output. We find a striking coincidence of high gross savings rates and high output variability when real GDP gaps are estimated from a constant growth trend. But there is also strong evidence that this coincidence is an artifact. The major conclusion is that there is not a robust relationship between average gross savings rates and the variability of real GDP gaps (measured as deviations from trends) between 1960-Q1 and 1988-Q4. We also report a number of interesting features regarding estimated autoregressive processes for output in the major foreign industrial countries.
A Substitute for the Capital Stock Variable in Investment Functions
Authors: Stevens Guy V. G.
Published: August 2019

Capital stock variables appearing in investment and other equations are almost always constructed by the "perpetual inventory method." Successive values are related by the well-known equation:where K(t) is the measure of the real capital stock at time t, I(t) is the real rate of investment, and the rate of depreciation. By successive backward substitutions for K(t-l), K(t) can be expressed equivalently as a weighted sum of past levels of investment plus the depreciated value of an initial real capital stock:The initial real capital stock, K(O), that is implicitly a component of every measure of the capital stock calculated by this method can rarely be measured, however, with any degree of accuracy. As demonstrated in this paper, the measurement error can frequently lead to severe bias in the estimated coefficients of investment functions.This paper proposes a method to bypass this source of measurement error. In important cases it is then possible to estimate unbiased and consistent coefficients.
Prospects for Sustained Improvement in U.S. External Balance: Structural Change Versus Policy Change
Authors: Mann Catherine L.
Published: August 2019

This paper assesses prospects for sustained improvement in the U.S. external balance drawing on both model-based macro analysis and examination of disaggregated data. Most model projections of the future path of U.S. external balance show the recent improvement petering out by the end 1989 or so. Key structural factors leading to the expected future worsening of U. S. external balance are two asymmetries--the "income asymmetry" and the "pass-through asymmetry". That is, asymmetries in the pricing behavior of U.S. exporters and foreign suppliers and asymmetries in the elasticities of U.S. demand for imports and foreign demand for U.S. exports with respect to economic activity.However, could projections based on historical relationships be misleading? Have these models ignored important changes in the international environment? Changes in trading partners and composition of trade, in income responsiveness, exchange rate movements and price competitiveness, the net debt position, trade protection, long-term supply response, and model uncertainty are considered.Plausible (or sometimes implausible) changes in the historical relationships do not materially change the medium-term outlook for a future deterioration in U.S. external balance. However, model uncertainty suggests that confidence intervals around the point estimates of key parameters are sufficiently large that periods of improvement in U.S. external balance are within the realm of statistical probability; nevertheless, the outlook for sustained improvement remains problematical.This suggests that outcomes for growth and the exchange rate different from those assumed in the projections, and which would probably stem from a different configuration of fiscal and monetary policies here and abroad, are likely necessary to put U.S. external balance on a sustainable path.
Post Econometric Policy Evaluation: A Critique
Authors: Ingram Beth , Leeper Eric Michael
Published: August 2019

An increasingly popular approach to policy evaluation involves applying the parameters calibrated for a real business cycle model that does not include policy to a different model, where policy does affect private decisions. This technique, in effect, estimates a model that misspecifies how private behavior depends on policy. The calibrated parameters depend on policy behavior, but calibrators overlook this dependence when projecting policy effects. This procedure repeats the "Keynesian" errors that Lucas (1976) noted in his influential critique of (then) standard methods of econometric policy evaluation and produces predictions of policy consequences that may be no more useful than ones from traditional econometric models.
Precautionary Money Balances with Aggregate Uncertainty
Authors: Coleman Wilbur John
Published: August 2019

This paper studies the dependence of velocity on stochastic monetary growth in a model where households demand money for both its transactions and precautionary services. The setup consists of a cash-in-advance economy in which individual uncertainty leads households to value money for its insurance against adverse endowment shocks. With stochastic monetary growth the distribution of money balances across households does not settle down to a time invariant distribution, so one aim of this paper is to model this distribution as an endogenous state variable.
Determining Foreign Exchange Risk and Bank Capital Requirements
Authors: Leahy Michael P.
Published: August 2019

This paper examines three alternative measures of exchange rate risk that could be used to develop a risk-based capital requirement for banks with foreign-exchange exposure. One measure, the standard deviation of the portfolio, is constructed under the assumption that exchange rate changes are distributed normally. While this measure is widely used in a variety of financial applications, it is subject to the criticism that it fails to capture well the behavior of exchange rate changes in the tails of their density function. A second possible measure is developed that combines the standard deviation and a method used by the Bank of England to assess foreign exchange exposure. This measure fails to represent the tail behavior and correlation patterns of exchange rates. The third measure uses nonparametric methods to determine capital requirements. The third measure does not suffer from the deficiencies of the other two: it allows for a rich pattern of exchange rate correlations and for non-normal characteristics in the tails of the density function.Because of the generality of the nonparametric method, it is used to quantitatively assess the deficiencies of the other two measures. In a sample of simulated portfolios of marks, yen, and sterling, it is shown that the standard deviation measure is likely to yield capital requirements that are too small relative to the nonparametric measure. The second measure behaves on average like the standard deviation measure but the capital requirement is more erratic: it generates too much capital for some portfolios and too little capital for others in larger proportions than the standard deviation measure.
Exchange Rate Rules in Support of Disinflation Programs in Developing Countries
Authors: Kamin Steven
Published: August 2019

This paper analyzes how exchange rate policies can best support the sustainability of disinflation programs. Freezing the nominal exchange rate frequently has been recommended as a means of suppressing inertial inflation and accelerating the disinflation process. However, because any resultant real exchange rate appreciation often must be corrected through a subsequent devaluation, targeting the nominal exchange rate may merely postpone inflation rather than eliminate it once-and-for-all. This paper argues that because excessive inflation during any particular period may jeopardize the stabilization program, exchange rate policies should be designed to smooth inflation across all phases of the disinflation experience. Toward that end, an initial devaluation followed by partial indexation of the exchange rate to domestic prices may be useful. The paper then considers how inconsistencies between an exchange rate rule and balance-of-payments viability may lead to "reserves crises". Depending upon the credibility of the government's commitment to stabilization, the devaluation prompted by a reserves crisis could trigger additional inflation sufficient to cause the failure of the disinflation program. These considerations underscore the importance of policies that prevent excessive appreciation of the real exchange rate during the disinflation process.
Taxation and Inflation: A New Explanation for Current Account Imbalances
Authors: Bayoumi Tamim , Gagnon Joseph E.
Published: August 2019

In a world of mobile capital, the current system of nominal interest taxation implies that the cost of capital and the return to saving in each country are strongly and negatively correlated with the rate of inflation. It follows that a country's net foreign asset position (and its current account balance) ought to be negatively correlated with its inflation rate. The magnitude of these effects is shown to be large, both theoretically and empirically. For OECD countries, cross-sectional regressions confirm that inflation rates are good predictors of current accounts, even after controlling for business cycles and government budget deficits. These results imply that existing current account imbalances largely reflect tax distortions rather than an optimal allocation of world savings.
Central Banks' use in East Asia of Money Market Instruments in the Conduct of Monetary Policy
Authors: Emery Robert F.
Published: August 2019

The paper examines the greater use in the past decade of money market instruments in the conduct of monetary policy by the central banks, or their equivalent, in six of the main East Asian developing economies. Some of these economies have been successful in using various money market instruments to control liquidity, while others have been much less successful. A common theme in the case of the successful economies has been one of employing money market instruments that have yields based on actual market demand and supply. In those cases where the yields have been unrealistic due to not being based on market conditions, the open market operations have generally not been successful. Indonesia's past experience would be an example of this. Based on the experience of these economies, it is suggested that a viable market in treasury bills issued by the national government--not the central bank--be developed for the central bank's use in its monetary policy operations. The advantages of a well-developed open market operation over other traditional monetary policy instruments are cited near the end of the paper.
Daily Bundesbank and Federal Reserve Intervention and the Conditional Variance Tale in DM/$-Returns
Authors: Almekinders Geert J. , Eijffinger Sylvester C. W.
Published: August 2019

This paper reports on the results of an empirical investigation into the objectives of daily foreign exchange market intervention by the Deutsche Bundesbank and the Federal Reserve System in the U.S. dollar-deutsche mark market. Tobit analysis is implemented to estimate the intervention reaction functions consistently. It is found that an increase in the conditional variance in daily exchange rate returns derived from a GARCH model estimated in the paper, led the Bundesbank and the Federal Reserve to increase the volume of intervention, both in case of dollar-sales and purchases on account of their leaning against the wind policy.