bluuebunny/crossref_metadata_2025 huggingface dataset:
Canadian Financial Markets: The Government's Proposal for Reform
Authors: Schinasi Garry J.
Published: August 2019

This paper discusses Canada's financial sector, recent institutional changes, and the Government's recent (April 1985) proposal for financial market reform and its likely impact. Canada's financial markets have been dominated by traditional financial institutions known as the "four pillars". Although traditions and regulations have contributed to the evolution of Canadian financial markets, economic conditions and customer-provided incentives have recently created the major impetus for change. Structural changes have occurred along three separate but related tracks: product and service innovation by banks and near-banks; less market segmentation; and conglomeration. Political pressures have led the federal and provincial governments involved to accommodate the changes that occurred and to encourage changes that were clearly inevitable. The Government of Canada is currently proposing sweeping regulatory reform of financial institutions to encourage more competition for the dominant chartered banks, to establish more effective safeguards to protect consumers, to ban self-dealing, and to insure the stability of the financial system. If implemented, the proposal may alter the traditional roles of financial institutions and their relationship with the federal government.
Elections and Macroeconomic Policy Cycles
Authors: Rogoff Kenneth S. , Sibert Anne C.
Published: August 2019

There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycle in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycle is driven by temporary information asymmetries which can arise if, for example, the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private information is either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent party's popularity does not necessarily imply a damped policy cycle.
An Analysis of the Welfare Implications of Alternative Exchange Rate Regimes: An Intertemporal Model with an Application
Authors: Feltenstein Andrew , Lebow David E. , Sibert Anne C.
Published: August 2019

We construct a two-period model of an open economy and use the model to analyze the welfare implications of fixed and floating exchange regimes. Consumers have perfect foresight and save by holding domestic and foreign bonds, which are chosen according to relative interest rates, deflated by the rate of devaluation of the domestic currency. The government produces a pure public good and finances its deficits by issuing money, domestic bonds, and by foreign borrowing. The government's bonds compete with private investment, which is entirely debt financed. Foreign exchange, i.e., foreign bonds, is made available via the current account, endogenous private borrowing, and exogenous public borrowing. The government, in turn, acts as a passive auctioneer, trading foreign currency at market prices, and the exchange rate is defined as the domestic price of foreign bonds.The parameters of the model are estimated for Australia, and two counterfactual simulations have been carried out. In the first of these, a fixed exchange regime has been imposed upon 1983-84, when the exchange rate was actually allowed to float. Assuming that all exogenous parameters remain constant, the welfare implications of the two regimes are compared. The floating regime is found to be welfare superior for both categories of domestic consumers. Similar results are derived in a simulation in which the floating regime is imposed upon 1981-82, when a fixed exchange regime was actually in place. Our initial conclusion would be that, from the point of view of consumer welfare, floating exchange rates are superior to fixed rates in this Australian case.
The Prospect of a Depreciating Dollar and Possible Tension Inside the EMS
Authors: Melitz Jacques
Published: August 2019

This paper analyses the possibility of increased tensions in the European Monetary System (EMS) as a result of the recent dollar depreciation. The analysis employs a static, fairly stylized macroeconomic model in which the EMS is characterized as a means of achieving a cooperative outcome even though policymakers in member countries weigh output-inflation tradeoffs differently. Compared with the Nash (noncooperative) equilibrium, such cooperation is shown to have been welfare-improving for member countries before the depreciation of the dollar began. However, the inflationary consequences of the dollar depreciation in Europe give rise to the possibility that even if there is an optimal realignment afterwards, the members will not be able to achieve a better output-inflation tradeoff within the EMS than outside of it.
An Empirical Analysis of Policy Coordination in the United States, Japan and Europe
Authors: Edison Hali J. , Tryon Ralph W.
Published: August 2019

Coordination of macroeconomic policy has been a major topic at recent summit meetings, and has been the subject of a number of theoretical studies. However, relatively little empirical research exists on policy coordination. This paper is an attempt to help fill this gap. The paper considers the quantitative importance of the coordination of fiscal and monetary policy under flexible exchange rates. We also evaluate the mechanisms by which the effects of macroeconomic policy are transmitted abroad. The nature of the equilibrium reached in the absence of coordination is also analyzed, and the empirical results are related to the theoretical literature. The analysis is based on simulations with the Multicountry Model (MCM) developed at the Federal Reserve Board.
Should Fixed Coefficients be Reestimated Every Period for Extrapolation?
Authors: Swamy P. A. V. B. , Schinasi Garry J.
Published: August 2019

This paper demonstrates that forecast accuracy is not necessarily improved when fixed coefficient models are sequentially reestimated, and used for prediction, after updating the database with the latest observation(s). This is at variance with the now popular method (see Meese and Rogoff (1983, 1985)) of sequentially reestimating fixed coefficient models for prediction as new data "rolls" in. It is argued that although "rolling" may minimize the variance of predictions for some classes of estimators, "rolling" does not necessarily yield accurate predictions (i.e., predictions that are close to actual data). Minimizing the mean squared prediction errors is a necessary condition for maximizing the probability that a given predictor is more accurate than other predictors. This minimization need not require, and may even exclude, the most recent data. A by-product of the demonstration is that for predictors based on the same sample size, a predictor with smaller variance need not be more accurate than another predictor with a larger variance.
Incomplete Insurance, Irreversible Investment, and the Microfoundations of Financial Intermediation
Authors: Johnson Robert A.
Published: August 2019

The financial intermediary is shown to result from a market imperfection related to the costly monitoring of the actions of consumers. In such an environment complete insurance is not obtainable and consumers respond by holding some of their wealth as precautionary balances in order to self-insure. Precautionary balances are those financial vehicles which permit one to invest and then liquidate with the smallest amount of loss because of the "sunk costs" associated with the transaction. An economy of N identical consumers is created and it is shown that a financial intermediary which collects the precautionary balances of the community can then implement risk sharing and liberate social resources for greater investment.
Anticipated Fiscal Contraction: The Economic Consequences of the Announcement of Gramm-Rudman-Hollings
Authors: Johnson Robert A.
Published: August 2019

The announcement of a plan to cut the U.S. federal budget deficit through the Gramm-Rudman-Hollings legislation provides an excellent opportunity to examine the influence of expectations on economic behavior. This paper presents a small forward-looking macroeconomic model and simulates the effects of the announcement of a multistaged reduction in the fiscal deficit. Open and closed economy specifications are compared and contrasted to highlight the importance of international transmission mechanisms in macroeconomic adjustment. The results of the simulations are compared with the stylized facts of the U.S. macroeconomy over the period surrounding the passage of the Gramm-Rudman-Hollings legislation.
An International Arbitrage Pricing Model with PPP Deviations
Authors: Levine Ross
Published: August 2019

This paper develops an intertemporal, international asset pricing model for use in applied theoretical and empirical research. An important feature of the model is that it incorporates both stochastic inflation rates and stochastic Purchasing Power Parity deviations (PPP). The model derives the equilibrium real return on assets, and obtains empirically tractable reduced form equations which can be used to examine such issues as capital market segmentation, currency substitution, exchange rate volatility, and the forward exchange market's risk premium. Mechanically, the model begins as a system of stochastic differential equations which describe the dynamic paths of a vector of state variables, prices, and PPP deviations. The state variables' intertemporal development determines the production and credit opportunities, and provides the model's fundamental dynamic nature. The model is shown to be consistent with the domestic-general equilibrium asset pricing models of Cox, Ingersoll, and Ross (1985) and Brock (1982). The model is applied to pricing forward exchange, and an empirically tractable equation of the risk premium is derived which will allow researchers to uncover the risk premium's economic determinants.
The United States International Asset and Liability Position: A Comparison of Flow of Funds and Commerce Department Presentations
Authors: Van der ven Guido E. , Wilson John F.
Published: August 2019

This paper presents a detailed description of how the Flow of Funds' foreign sector asset and liability account is derived. The statistics found in the Flow of Funds' (FOF) foreign sector are related to the Commerce Department's U.S. International Investment Position (IIP) tabulation; a survey of information sources for the foreign sector shows how these data are largely reconcilable with the Commerce Department's IIP. A second section of the paper, based on these statistics, offers some observations about recent developments in the United States' net international investment position.
The International Debt Situation
Authors: Truman Edwin M.
Published: August 2019

This paper examines several aspects of the problem of international debt that has been a feature of the world economy of the 1980s. First, the paper considers the sources or causes of these problems. It goes on to consider responses to those problems, the outlook for international lending, and the criteria that might be used to conclude that they have been dealt with effectively. The paper concludes by examining some of the risks to continued progress in dealing with the problem of international debt.
The U.S. External Deficit in the 1980's: An Empirical Analysis
Authors: Helkie William L. , Hooper Peter
Published: August 2019

This paper presents an empirical analysis of the factors that contributed to the unprecedented widening of the U.S. external deficit between 1980 and 1986. The paper presents an empirical model of the U.S. current account that is used to assess the relative importance of changes in U.S. price competitiveness and changes in U.S. and foreign growth as determinants of the deficit. We find that while both factors were significant, the decline in U.S. competitiveness associated with the appreciation of the dollar was the dominant factor. The analysis is also pursued at a more fundamental level, using the results of various multicountry model simulations. We find that shifts in U.S. and foreign fiscal policy could account for over half of the widening of the deficit, but only part of the rise in the dollar. Given the importance of the dollar's appreciation to the widening of the deficit, we ask, finally, why the deficit (particularly in real terms) has been so slow to respond to the dollar's decline since early 1985. Several possible explanations are considered and we conclude that the delay can be attributed largely to normal lags in the response of trade prices and volumes to exchange rate changes. Moreover, the real net export deficit would have widened substantially further in the absence of the depreciation.
A Reassessment of Measures of the Dollar's Effective Exchange Value
Authors: Pauls B. Dianne , Helkie William L.
Published: August 2019

Recent attention has focused on measures of the dollar's effective exchange rate amid disappointment by some observers with the response of the U.S. trade balance to the depreciation of the dollar since February 1985. In particular, these observers suggest that the traditional indexes, which include only currencies of industrial countries, overstate the dollar's decline because it has depreciated much less against the currencies of some key newly industrialized trading partners.This paper begins with a description of the uses of effective exchange-rate indexes and describes theoretically the choice of an index, which varies with the application. Although the inclusion of currencies of developing countries in an index may be useful for analyzing trade developments, it is not appropriate for some other purposes, such as providing information for monetary conditions. The latter part of the paper focuses on measures of exchange rates suitable for analyzing trade flows and domestic inflation and compares their performance in the context of the equations used by the Federal Reserve Board staff to forecast trade components and price deflators for exports and imports. The results suggest that the addition of the currencies of important developing-country trading partners in an index of exchange rates improves its performance in forecasting export volume and import prices but makes little difference for the forecasts of export prices.
A Simple Simulation Model of International Bank Lending
Authors: Terrell Henry S. , Dohner Robert S.
Published: August 2019

The paper develops a simple simulation model of international bank lending to test the extent to which targeting of fixed shares in the stock of total bank claims on a borrower can make lending flows unstable. The model is based on three distinct types of lending strategies: potentially volatile lending by one group of banks with limited long-term commitment to international lending; the targeting of a given share of the total lending market; and lending based on an assessment of the borrower's creditworthiness.The results of the model's simulations suggest that lending flows can become quite unstable if more than one-half of international bank lending is predicated on the maintenance of market share. The model also indicates an ambiguous role for market information in preserving stability. To the extent that improved public information about the lending activities of banks causes more banks to target market share, such information can result in market instability. However, under a rational expectation version of the model, if the increased information about bank lending behavior is used by some banks to improve their forecasts of the reactions of other banks it can serve to stabilize the system.
Protection and Retaliation: Changing the Rules of the Game
Authors: Mann Catherine L.
Published: August 2019

An examination of the macroeconomic, political, and institutional environment of the 1930s and the 1980s suggests a set of stylized facts associated with periods of trade tension and incidents of trade retaliation. Periods of macroeconomic stress precipitate changes in the conduct of and implementation of U.S. trade policy, which then can lead to escalating trade tension, protectionist measures, and perhaps retaliation. Macroeconomic stress, especially when linked to external events, decreases the political benefits of following a liberal trade policy and changes the economic consequences of following a particular trade strategy. As a result, it may be difficult for trading partners to predict the conduct of U.S. trade policy. Moreover, in reexamining its commitment to free trade, the United States may change its response to policies abroad. Finally, the United States may not only deviate from its established behavioral norms, but may also stray from the consensual international code of trade conduct.These stylized relationships between macroeconomic environment and political and institutional pressures are applied to a simple game-theory paradigm. Changes in the environment and balance of political power change the elements of a payoff matrix. The policy implications of the model are that the United States should, subject to the constraints of a democracy, make clear both the direction of its trade policy and the magnitudes of any penalties. Much of the tit-for-tat trade retaliation observed in recent months may represent just such a communications effort.
The Effect of Multilateral Trade Clearinghouses on the Demand for International Reserves
Authors: Meade Ellen E.
Published: August 2019

This paper attempts to capture the portfolio incentives for central bank participation in a multilateral trade clearinghouse and to discuss the relation of those incentives to the volume of trade. ClearingÂ­houses for the netting of multilateral intra-regional trade have existed since the 1950s, but no work to date has attempted to explore the incentive effects of such arrangements. Instead previous work, primarily empirical, has focused on the tendency of preferential arrangements (clearing as well as favorable protectionist policies) between nations to encourage trade flows between them. This paper advances the notion that the effects of clearing arrangements must be modelled as a portfolio choice problem, in order to ascertain the precise influence of clearing alone.The model developed here describes the choice of the central bank between holding reserve balances and investing in productive assets. For a given distribution of net export receipts and a given cash management policy of the central bank, expected daily demand for international reserves is derived. This demand is re-derived to illustrate the effects of a clearingÂ­house; in addition, reserve demand is augmented to account for debt payments to external creditors.Regardless of whether the central bank makes external debt payÂ­ments, the clearing arrangement reduces the demand for reserves to finance trade. It is possible, were the "freed" reserves invested in development of the export industry, that the clearing arrangement could translate into an increased volume of trade. If the country is burdened with external debt payments however, it is possible that the "freed" reserves would simply be used to increase payments to external creditors.
Monetary Policy in Taiwan, China
Authors: Emery Robert F.
Published: August 2019

This paper examines how Taiwan, China, has used monetary policy to deal with the impact of the two oil shocks since 1973, as well as with the recent problem of a very large rise in foreign exchange holdings. In dealing with the inflationary pressures brought on by the two oil shocks, the central bank relied primarily on changes in its rediscount rate to reduce inflationary pressures. However, the changes were initially too small and too late to prevent a large rise in consumer prices in 1974 and 1980. Since 1985, the large gains in foreign exchange reserves, due to a rising trade surplus and capital inflows have sharply expanded the money supply. The burden of containing this inflationary threat has fallen on monetary policy, and the government has not been able to offset the build-up in reserves by prepayment of external debt since the amount of outstanding debt is relatively small. In addition, use by the central bank of its rediscount policy or changes in reserve requirements has not been appropriate as domestic credit expansion has been low and not a basic cause of the large rise in liquidity. Instead, the central bank has relied almost exclusively on open market operations. It has engaged in a massive sterilization operation, selling primarily central bank certificates of deposit to neutralize the potentially inflationary impact from the large rise in the money supply. So far the central bank has been successful in holding the inflation rate to a low level, but it is not yet clear whether the present strategy will continue to be successful. Some suggestions of new basic measures for restoring a sustainable equilibrium between the external and domestic sectors are discussed.
Exchange Rate Regimes and Macroeconomic Stabilization in a Developing Country
Authors: Howard David H.
Published: August 2019

Argentina's Austral Plan is used as a point of departure for the investigation of the role of exchange rate policy in a macroeconomic stabilization program for a developing country. A model of a country like Argentina is developed and the relationship between the exchange rate and macroeconomic policy is derived. The paper next explores the implementing of alternative macroeconomic policy strategies involving exchange rates. The framework provides a rough way of quantifying and making operational what is meant by "appropriate" fiscal and monetary policy in the context of a stabilization program. Finally, some practical aspects of implementing an exchange-rate-oriented macroeconomic stabilization program are discussed.
Improving the Forecast Accuracy of Provisional Data: An Application of the Kalman Filter to Retail Sales Estimates
Authors: Pauls B. Dianne
Published: August 2019

If forecasts of economic activity are to rely on preliminary data, the predictable component of the data revisions should be taken into account. This paper applies the Kalman filter to improve the forecast accuracy of published preliminary estimates of retail sales. Successive estimates of retail sales are modeled jointly as a vector autoregressive process, incorporating panel rotation and calendar effects. Estimates of retail sales based on this model are then combined with the raw Census estimates via the Kalman filter. This technique, which may be applied to other bodies of data, yields a significant improvement in the efficiency of the raw Census data, reducing the mean-squared error by about 1/3.
Income and Price Elasticities of Foreign Trade Flows: Econometric Estimation and Analysis of the U.S. Trade Deficit
Authors: Marquez Jaime R.
Published: August 2019

This paper builds, estimates. and simulates a world trade model to provide a quantitative analysis of the behavior of the U.S. trade deficit. A key feature of this model is that international trade imbalances add up to zero. The analysis estimates income and price elasticities for bilateral import equations, tests for the properties of the error term, for parameter constancy, and for the choice of dynamic specification. The paper also reÂ­examines the structural asymmetries in elasticities noted by Houthakker and Magee and tests whether the Marshall-Lerner condition holds. The reliability of the model as a whole is assessed with residual-based stochastic simulations. The paper finds that changes in relative prices account for the bulk of the deterioration of the U.S. trade account, that reliance on either foreign or domestic growth to eliminate the U.S. external imbalances entails significant changes in real income, and that the speed with which U.S. net exports respond to exchange rate changes is sensitive to minor changes in ownÂ­price elasticities.
The Determinants of the Growth of Multinational Banking Organizations: 1972-86
Authors: Dohner Robert S. , Terrell Henry S.
Published: August 2019

The paper develops an empirical model to explain growth of total assets of a sample of the world's largest banks. The model was estimated over a period in which U.S. banks' assets grew less rapidly than the assets of large banks headquartered in other industrial countries. The model provides an estimate of the banks' allocation between home currency and foreign currency assets which allows an estimate of the impact of exchange rate exchanges on bank asset growth.The results of the model suggest that no single economic variable explains the faster growth of non-U.S. banks. Changes in real exchange rates were estimated to have had a significant impact on bank asset growth through their impact on the dollar value of banks' home-currency assets. This impact was greater over a shorter time period when exchange rate movements tended to be larger. Over the longer run other factors, such as faster home-country economic growth, an expanding trade and foreign investment sector, and the ability of large banks to retain their share of domestic intermediation, tended to be relatively more important.The model tested whether banks headquartered in particular countries tended to respond in a similar manner to economic variables and could be aggregated into a single behavioral equation. Aggregation was generally indicated for non-U.S. banks and was rejected for American banks. The model overpredicted asset growth for large U.S. and Canadian banks after 1982, suggesting that various factors including pressure by bank regulators to increase capital ratios and asset quality questions may have affected their asset growth sooner than banks headquartered in other countries.
Competition By Choice
Authors: Dudey Marc
Published: August 2019

This paper relates firm location choice and consumer search. Firms that cluster together attract consumers by facilitating price comparison, but clustering increases the intensity of local competition. I construct a simple model which shows that firms may choose head-on competition by locating together. In special cases, this can be the unique equilibrium outcome. I also use the model to show that price setting firms may earn more in equilibrium than quantity setting firms.
Real Interest Rates during the Disinflation Process in Developing Countries
Authors: Kamin Steven , Spigelman David Frederic
Published: August 2019

This paper addresses a phenomenon often noted in association with programs aimed at stabilizing high rates of inflation: a rise in the ex post real interest rate following implementation of the disinflation strategy. Such increases have been observed in connection with the stopping of European hyperinflations in the 1920s, as well as during the more recent experiences of disinflation in Argentina and Israel. To better understand this behavior, we develop a very general model of interest rate determination in a small open economy with two goods--traded and non-traded--and three assets--money, domestic bonds, and foreign bonds. We show that in partial portfolio equilibrium, a reduction in the fiscal deficit leads to a fall in inflation exceeding the decline in nominal interest rates, so the real interest rate rises; this effect derives from the increase in money demand resulting from the disinflation. In partial goods-market equilibrium, however, a reduction in the fiscal deficit reduces goods demands and lowers the real interest rate. In consequence, the general equilibrium response of the real interest rate to a disinflation program based on fiscal contraction is shown to be indeterminate.The framework described above is used to examine the response of real interest rates to Argentina's disinflation in 1985. We show that the reduction in the fiscal deficit, as well as the government's shift away from money-financing, should have increased real interest rates substantially. However, the imposition of the Austral Plan appears to have exerted an independent effect in reducing interest rates, so that the impact of the program on the real rate of interest was largely neutralized.
International Banking Facilities
Authors: Key Sydney J. , Terrell Henry S.
Published: August 2019

The Federal Reserve Board permitted banking offices located in the United States to establish International Banking Facilities (IBFs) beginning in December 1981. The purpose was to allow these banking offices to conduct a deposit and loan business with foreign residents, including foreign banks, without being subject to reserve requirements or to the interest rate ceilings then in effect. IBFs are also exempt from the insurance coverage and assessments imposed by the Federal Deposit Insurance Corporation. In addition, a number of states have encouraged banking institutions to establish IBFs by granting favorable tax treatment under state or local law for IBF operations.This paper summarizes the history of the IBF proposal and discusses Federal Reserve Board regulations for IBFs and the treatment of IBFs under state and local tax law. The paper analyzes IBF activities and the use of IBFs in comparison with domestic offices and with foreign branches. The growth of IBFs is evaluated in relation to activities in other international banking centers. The paper concludes that IBFs have not turned out to be the dramatic innovation that some had predicted and that IBFs simply provide another center for booking transactions with foreign residents in a regulatory environment broadly similar to that of the Euromarket. In particular, IBFs appear to be used for a large proportion of transactions with foreign residents that were, or would otherwise have been, booked at Caribbean branches of U.S. banks. To date, the operation of IBFs has not presented a problem either for the conduct of domestic monetary policy or for bank supervision.
The Forward Exchange Rate Bias: A New Explanation
Authors: Levine Ross
Published: August 2019

Although the literature has devoted prodigious resources to investigating the risk premium explanation of the systematic time-varying discrepancies between forward and corresponding future spot exchange rates, empirical verification of the risk premium hypothesis has proven elusive. This paper tests an alternative explanation of the forward bias: the anticipated real exchange rate hypothesis. This hypothesis states that except for a constant risk premium, the predictable, time ­varying wedge between forward and expected future spot exchange rates is fully explained by the anticipated rate of change in the real exchange rate. The data do not reject this hypothesis. This suggests that the literature's almost singular concern with the risk premium explanation of the forward bias should be amended to include the effects of anticipated real exchange rate movements.
The Profitability of U.S. Intervention
Authors: Leahy Michael P.
Published: August 2019

In this paper I address some of the issues associated with measuring the profits and losses from intervention and show that U.S intervention since the beginning of generalized floating in 1973 has earned positive economic profits for the U.S. monetary authorities. Profitability has been largest during episodes of intervention that have generated large foreign-exchange exposures. Fundamental explanations for the profitability of intervention are difficult to isolate, but I discuss possibilities that are consistent with the data. Finally I consider the effects profitable intervention may have on macroeconomic activity through its effect on the government budget constraint.
U.S. External Adjustment: Progress and Prospects
Authors: Helkie William L. , Hooper Peter
Published: August 2019

This paper presents an empirical analysis of the progress in U.S. external adjustment through 1988 and prospects for continued adjustment over the years ahead. Our analysis, based in part on a partial-equilibrium model of the U.S. current account, suggests that adjustment was slower than "expected" during 1986-87, and faster than expected during the first half of 1988. The model was about "on track" in the second quarter of 1988, but did not anticipate the drop off in the trade balance in the second half of the year. We consider various model extrapolations of the U.S. external balance with exchange rates and income growth rates held unchanged. Our model, as well as those of other researchers, indicate that the U.S. external balance will narrow somewhat further during 1989, but will begin to widen again thereafter. This view may be overly pessimistic, due to some limitations of the models. In order to assess the credibility of these projections, we consider the issue of model uncertainty and construct error bands around the model projections using stochastic simulation techniques.
Exchange Rates and U.S. External Adjustment in the Short Run and the Long Run
Authors: Hooper Peter
Published: August 2019

The objective of this paper attempts to reconcile PPP-based views are model-based views about prospects for V.S. external adjustment in the medium term. Projections based on conventional models of the current account do not fully capture ongoing adjustments to exchange rate changes that are implicit in long-run PPP theory. In particular, the model-based projections fail to capture longer-run shifts in relative output capacity in response to sustained cost differentials (or deviations from absolute purchasing power parity) across countries. Such supply-side adjustments appear to have been quantitatively important in the past. With V.S. labor costs in manufacturing now noticeably below those in some other major industrial countries, these supply-side adjustments are potentially important in the period ahead. Nevertheless, when the model extrapolations are revised to factor in such longer-run adjustments, the projected deficit remains sizable.
External Debt and Developing Country Growth
Authors: Kamin Steven , Kahn Robert B. , Levine Ross
Published: August 2019

This paper examines the question of how the path of real GDP in four important Latin American countries, Argentina, Brazil, Chile and Mexico, might have differed if the sharp run-up in borrowing during the late 1970s and early 1980s had not occurred. Specifically, we ask whether these countries are better off or worse off for having borrowed heavily prior to the debt crisis, and we attempt to gauge the extent to which they would have received greater benefits if policies that improve economic efficiency had been followed. A simple macroeconomic mode is developed, and the simulation results are compared to the historical outcomes.
An Econometric Analysis of UK Money Demand In Monetary Trends in the United States and the United Kingdom by Milton Friedman and Anna J. Schwartz
Authors: Hendry David F. , Ericsson Neil R.
Published: August 2019

This paper evaluates an empirical model of UK money demand developed by Friedman and Schwartz in Monetary Trends... .Testing reveals mis-specification and hence the potential for an improved model. Using recursive procedures on their annual data, we obtain a better-fitting, constant, dynamic error-correction (cointegration) model. Results on exogeneity and encompassing imply that our money-demand model is interpretable as a model of money but not of prices since its constancy holds only conditional on contemporaneous prices.
International Economic Policy: The Role of Exchange Rates
Authors: Truman Edwin M.
Published: August 2019

This paper examines the role of exchange rate changes in the international economic adjustment and policy process. The pre-1973 academic literature on flexible exchange rates is examined in light of the experience since 1973. Some thoughts on the efficacy and appropriate role of exchange rate changes in the international economy are then presented.
Implications for Future U. S. Net Investment Payments of Growing U.S. Net International Indebtedness
Authors: Stekler Lois E. , Helkie William L.
Published: August 2019

In the 1980s, the United States developed a large and persistent current account deficit, financed by borrowing from abroad. The purpose of this paper is to explore the sustainability of these large deficits from one of several possible perspectives. Simulations of a model of the U.S. current account are used to examine the future servicing burden implied by the accumulating U.S. indebtedness to foreigners (or more precisely by the negative net international investment position).
European Integration, Exchange Rate Management, and Monetary Reform: A Review of the Major Issues
Authors: Schinasi Garry J.
Published: August 2019

Since the adoption of the Single European Act in 1986, doubts have been expressed about the ability of the European Monetary System as presently structured to ensure an efficient and effective monetary system for the single European market. The further adoption by the European Council (June 1989) of the Report on Economic and Monetary Union (the Delors report) moves the European Community towards even greater monetary integration.Policy discussions have focussed on perceived problems with the current institutional and political structure of the European Monetary System and its exchange rate mechanism. Some have stressed that the current system is inherently asymmetric in the sense that it places greater burdens of adjustment on countries whose currencies are in less demand. Others have stressed that the objectives of fixed exchange rates, free capital mobility, and the autonomy of national monetary policies cannot simultaneously be achieved. Others emphasize that not only is closer monetary policy coordination required but so is greater coordination in other policies including budgetary, tax, and trade policies. This paper reviews these and other issues relating to monetary integration in Europe. While the discussion attempts to highlight important aspects and implications of these issues, and attempts to present the many points of view, it does not attempt to resolve these issues.
Equilibrium in a Production Economy with an Income Tax
Authors: Coleman Wilbur John
Published: August 2019

A state-dependent income tax is incorporated into an intertemporal production economy. Methods are developed for establishing the existence and uniqueness of an equilibrium, and for explicitly constructing this equilibrium. Some tax-policy experiments are suggested, the results of which may have important implications in quantifying the effects of various tax policies.
An Empirical Assessment of Non-Linearities in Models of Exchange Rate Determination
Authors: Meese Richard , Rose Andrew K.
Published: August 2019

This paper examines the empirical relation between nominal exchange rates and macroeconomic fundamentals for five major OECD countries. Five theoretical models of exchange rate determination are considered. Potential non-linearities are examined using a variety of parametric and non-parametric techniques. We find that the poor explanatory power of the models considered cannot be attributed to non-linearities arising from time deformation or improper functional form.
Exchange Rate Variability and the Level of International Trade
Authors: Gagnon Joseph E.
Published: August 2019

There have been numerous theoretical and empirical studies of the effect of exchange rate variability on the level of international trade. Most theoretical studies have concluded that under reasonable assumptions exchange rate variability ought to depress the level of trade. Empirical studies generally have not identified a significant effect of exchange rate variability on trade flows. This paper builds a theoretical model in which exchange rate variability has a negative effect on the level of trade. The model is calibrated to observed trade flows and real exchange rates. Simulation of the model demonstrates that the effect of increasing exchange rate variability on trade flows is very small. These results are not sensitive to a wide range of parameter values. Moreover, reasonable extensions of the model only serve to minimize further the effect of exchange rate variability on trade flows.
The Dynamics of Interest Rate and Tax Rules in a Stochastic Model
Authors: Leeper Eric Michael
Published: August 2019

A simple stochastic equilibrium structure is used to study the implications of monetary and fiscal policy interactions for government intertemporal budget balance. Existence and uniqueness of monetary equilibria are shown to depend on parameters of policy rules. The paper derives closed form solutions for equilibrium inflation and real debt as functions of policy parameters and policy shocks and obtains conditions under which the usual tests that deficits Granger-cause money creation will successfully uncover evidence of monetized deficits. In addition, equilibria are studied in which private agents today know tomorrow's taxes exactly. Coupling this informational assumption with a monetary policy that pegs the nominal interest rate reverses the usual Granger-causal ordering between deficits and monetization, so that money growth (or inflation) may predict higher deficits. This implies that empirical work designed to detect that deficits have been monetized by testing whether deficits Granger-cause money creation, may fail to uncover the monetization.
Towards the Next Generation of Newly Industrializing Economies: The Roles for Macroeconomic Policy and the Manufacturing Sector
Authors: Mann Catherine L.
Published: August 2019

In the 1970s, the Newly Industrializing Economies (NIEs) emerged from the pack of developing countries by exporting manufactured goods. Some succeeded and some did not. In this decade, another set of developing countries are poised to become the next generation of NIEs. Which have the prerequisites of stable macroeconomic policies and the foundation for further manufacturing development? A review of the Latin and Asian NIEs' experiences suggests criteria against which we can measure countries of the next generation.Macroeconomic criteria include: the savings-investment imbalance, but also their levels; fiscal deficit and the sectoral allocation of government spending; the magnitude and change in domestic and external exposure to interest payments on debt; the variability, degree, and duration of misalignment of the real exchange rate. But macroeconomic stability, while necessary, is not sufficient for sustained growth and development.A robust, competitive manufactured goods sector is also key. A growing manufactured goods sector increase the flexibility of the economy to respond to external and internal shocks and is associated with higher per capita income growth. World trade in manufactures is growing faster and at relatively better and less votatile terms of trade than trade in commodities. Criteria such as labor productivity in agriculture and manufacturing, population growth rates, and changes in the share of production and exports of manufactured goods provide evidence of which countries of the new generation can take advantage of the manufacturing dynamic.
The Global Economic Implications of German Unification
Authors: Alexander Lewis S. , Gagnon Joseph E.
Published: August 2019

This paper uses a multi-country econometric model to assess the global impact of rapid economic integration of the two Germanys. The fundamental assumptions are that East Germany brings relatively more labor than capital to the union than does West Germany, and that the economic structure of a united Germany is essentially identical to that of pre-unification West Germany. In all of the simulations economic union leads to an acceleration of growth and investment in Germany, a real appreciation of the DeutscheÂ­mark, and a reduction in Germany's current account surplus. The impact of German economic unification on other countries is relatively modest, as the additional investment demand is not large relative to global investment and a disproportionate share of that investment demand is met by domestic German savings.
The Term Structure of Interest Rates in the Onshore Markets of the United States, Germany, and Japan
Authors: Popper Helen
Published: August 2019

This paper investigates term premia behavior in U.S., German, and Japanese markets. Onshore returns are evaluated in order to focus on the co-movement of the term premia across a set of potentially heterogeneous markets. The paper extends the work of Campbell and Clarida [1987], who find that the term premia within the Euromarket appear to move together. In keeping with their approach, Hansen and Hodrick's [1983] latent variable model is used. The model constrains expected returns, conditional on an information set, to be proportional to one another. These restrictions are not rejected for the markets examined here, implying that the term premia behave as if in a single market.
Pricing to Market in International Trade: Evidence from Panel Data on Automobiles and Total Merchandise
Authors: Gagnon Joseph E. , Knetter Michael M.
Published: August 2019

This paper focuses on price discrimination in international trade that is associated with movements in exchange rates. This phenomenon is referred to as "pricing to market." We find strong evidence of pricing to market for Japanese exports of automobiles. We find moderate evidence of such behavior for German auto exports, and very little pricing to market for U.S. auto exports. We conjecture that these sharp differences in export pricing behavior may be due to differences in the extent of overseas production by firms based in these countries. Pricing to market may be more important to firms that do not have plants in their target markets.The patterns observed for automobiles do not hold up for total merchandise exports, where pricing to market varies by both source and destination country. These differences in measured pricing to market may reflect differences in the product mix of trade by source and destination.
Contractionary Devaluation with Black Markets for Foreign Exchange
Authors: Kamin Steven
Published: August 2019

Analyses of the possible contractionary effects of exchange rate devaluation typically assume the foreign exchange market to be unified, thereby ignoring the large fraction of transactions taking place in the black market for foreign exchange that exist in many developing countries. This paper explores how the existence of these black markets may alter the impact of an official devaluation on aggregate output. It is argued that devaluations will be followed by less immediate contraction in a blackÂ­market economy than in a unified-market economy, both because the black market exchange rate will depreciate by less than the official rate, and because many of the devaluation's contractionary effects will occur in anticipation of the official devaluation itself. These propositions are tested using a simple numerical simulation model.