HETEROGENEITY IN A CURRENCY UNION WITH SOCIAL MARKET OBJECTIVES

In this paper, we explore whether heterogeneity among union members could threaten the stability of the European Monetary Union. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership can be significant for countries whose transmissions, structure, or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.     

THE SUITABILITY OF A GREATER CHINA CURRENCY UNION

Abstract. The study assesses the level of integration among the three Greater China economies (China, Hong Kong and Taiwan) and examines the suitability of a Greater China currency union. The three economies already have extensive trade and investment linkages. Our analyses show that they share common long‐run and short‐run cyclical variations. We also estimate the output costs of relinquishing policy autonomy to form a currency union. The estimated output losses, which depend on, e.g., the method used to generate shock estimates, seem to be moderate and are likely to be less than the efficient gains derived from a currency union.     

CURRENCY VERSUS BANKING IN THE FINANCIAL CRISIS OF 1931

During the 1920s, Germany was the world's largest capital importer, financing reparations through U.S. credits. We examine financial channels in crisis transmission between these two countries around the German financial crisis of 1931. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. We find substantial crisis transmission from Germany to the United States via the financial channel, while monetary or financial crisis transmission from the United States to Germany was weak. We also find major real effects of the 1931 crisis on both economies, again transmitted via the financial channel.     

LABOUR MOBILITY AND TRANS‐TASMAN CURRENCY UNION*

The prospect of a common currency for Australia and New Zealand has been canvassed by senior poli‐ticians and bureaucrats, and has been the subject of academic debate. According to Mundell (1961 ), a high degree of internal labour mobility is a desirable feature of currency unions. This study looks at the extent to which long‐term migration between Australia and New Zealand responds to output shocks. Estimated VAR models and panel Granger‐causality tests demonstrate that shocks to relative per capita output have a significant and symmetrical impact on migration flows between Australia and New Zealand, and most of the impact is felt after about one year. Separating the shocks to Australia and New Zealand shows that ‘pull’ effects are more important than ‘push’ effects. Additionally, the trajectory of the Australian economy proves particularly influential for the choice of New Zealand emigrants. Although permanent migration responds intuitively to the state of the economy in Australia and New Zealand, the level of these migration flows is low in comparison to Australian inter‐state migration; yet it is high in relation to any third country.     

PREDICTING CURRENCY CRISES WITH A NESTED LOGIT MODEL

Abstract.  This paper is the first to apply a nested logit model to measure the probabilities of speculative attacks and the probabilities of successful defences by the central banks. This model allows us to predict the probability not only of speculative attacks but also of successful defences, given attacks. It also provides a framework for analysing the degree to which different factors affect the likelihood of attacks and defences. We find strong evidence that external illiquidity and financial fragility are reliable predictors of currency crises. The results shed light on the validity of the three generations of currency crisis models.     

CUSTOMER‐OWNED BANKING IN AUSTRALIA: FROM CREDIT UNION TO MUTUAL BANK

Since the 1990s financial sector regulation in Australia has treated credit unions and building societies the same as banks under the designated title of authorized depository institutions. This allows credit unions to choose between different organizational structures: cooperative; convert to customer‐owned banks or to demutualize. This article utilizes semi‐structured interviews to analyse the key motivations for organizational change. It examines a number of credit unions and their conversion experience to customer‐owned banks. It finds that adaptation of the credit union model was necessary to change customer perceptions, ensure future growth in the customer base and assets, and facilitate access to capital raisings with the credit rating of a bank. Despite this change customer‐owned banks retain the core principals of mutuality.     

ON THE FEASIBILITY OF A ONE-SPEED OR MULTISPEED EUROPEAN MONETARY UNION

This paper addresses two questions: (1) Is a twelve-country monetary union in Europe feasible? (2) Can monetary union be achieved at multispeed, i.e., with a small group of countries going first, and later admitting the others? After examining several politico-economic arguments concerning problems of feasibility of the union, we conclude with a fair amount of skepticism concerning the multispeed idea. We show that the final result of the process of monetary integration is dependent upon the number of countries that initiate it. Our discussion of feasibility sheds some light on the political economy of the recent (Fall 1992) turmoil in the monetary system of Europe.     

POLITICS WITH AND WITHOUT POLICY†

When strategic complementarities lead to the existence of multiple equilibria, a change in control of government may lead to changes in economic behavior by consumers or firms even if the different parties pursue the same policies. The existence of multiple equilibria, however, is not necessary to predict partisan effects. Furthermore, electoral uncertainty is not necessary to generate partisan effects; indeed, such uncertainty can dampen the cycle.     

THE FACE VALUE OF ARGUMENTS WITH AND WITHOUT MANIPULATION

A sender wishes to persuade a receiver with a (surprising) result that challenges the prior belief. The result stems either from sequential private experimentation or manipulation. The incentive to experiment and to manipulate depends on the quality threshold for persuasion. Higher thresholds make it harder to find a surprising outcome via experimentation and may encourage manipulation. Suppose there are observable nonmanipulable and manipulable research methods. For the decision quality, the quality threshold for persuasion for nonmanipulable methods should be higher than for manipulable methods. We discuss philosophy of science implications, such as field contingent quality standards and P‐value adjustments.     

VEHICLE CURRENCY*

Historically, the world economy has been dominated by a single currency accepted in the exchange of goods and assets among countries. In recent decades, the U.S. dollar has played this role. The dollar acts as a “vehicle currency” in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the U.S. dollar instead of using direct bilateral trade among their own currencies. A vehicle currency is desirable when there are transactions costs of exchange. This article constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency and show how it depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency’s government. We find that there can be significant welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetrically weighted toward the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle currency country.     

OPTIMAL BANKING STRUCTURE: IMPLICATIONS FOR INTERSTATE BANKING

This paper assesses the implications for the banking industry of relaxing interstate branching prohibitions. Theoretical models suggest that the number, size distribution, and specialization of firms in an industry are determined so as to minimize costs of production. Analysis presented here shows that interstate branching prohibitions, or their removal, are likely to affect costs only if the "convenience" of office location is important and if significant economies of scale are associated with office expansion. These conditions apparently do not hold in either retail banking or wholesale banking. The paper concludes that productive efficiency alone will not force a major consolidation of the banking system when branching restrictions are eliminated. To the extent that a consolidation does occur, it likely will reflect factors not considered in our model. These factors include (1) possibilities for increased diversification with greater size, (2) scarce managerial resources, (3) managerial incentives to maximize the organization's size, and (4) demand for multi-office banking.     

IGNORING ECONOMICS IN DEALING WITH THE SAVINGS AND LOAN AND COMMERCIAL BANKING CRISIS

This paper describes how the government has largely ignored economics in its recent attempts to deal with the deterioration of federally insured depository institutions. The most recent example was the Financial Institutions Recovery, Reform, and Enforcement Act (FIRREA) of 1989. Well documented and widely distributed studies have pointed out the decline of commercial banks. However, the FIRREA completely ignored commercial banks. The paper discusses the pervasive regulatory laxity and forbearance that existed toward banks during the 1980s despite the consequences of similar regulatory behavior toward savings and loans. The paper also shows how the FIRREA's major provisions regarding savings and loans ignore economic analyses. The paper discusses the implications of economic analysis for more appropriate government responses to the continuing deterioration of depositories.     

THE POSTAL SERVICE IN THE EUROPEAN UNION PUBLIC MONOPOLY OR COMPETITIVE MARKET?: A transaction cost approach

The paper discusses the relevant institutional and economic aspects of the postal service, and analyses both the arguments for abolishing the statutory monopoly and those for retaining it. The main thesis of the paper is that public and private postal services differ from each other in many aspects: transaction costs, the willingness of the customer to pay, market structure, and possibilities of substituting the service with other communication instruments. Therefore, a simple privatisation will not solve per se the efficiency problems of the service. furthermore, the European Commission, which published in 1992 a green paper on postal services, is considering the possibility of harmonising the quality of the service within the EU and gradually reducing the gap in national postal prices. This seems to be an effective device to force firms towards the greater efficiency required in a Continental market. In future, the competition will take place not so much between private firms (more interested in running the high-value segments), as between national public carriers, as shown by the phenomenon of remail.     

MONETARY POLICY IN ECONOMIES WITH LITTLE OR NO MONEY

Abstract. (1) Medium-of-exchange money will not entirely disappear in the foreseeable future. (2) In economies with no currency but settlement balances at the central bank, policy can be conducted much as at present by activist adjustment of overnight interest rates. (3) In economies without any money there can be no monetary policy. Liabilities of some official entity might serve as the medium of account, but there could be rivals. (4) A broad commodity-bundle monetary standard could be viable, even with a redemption medium, and there is scope for quantitative analysis of such systems. (5) The number of distinct national currencies may decline sharply.