IMF Support and Inter-Regime Exchange Rate Volatility

It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons one has to account for ‘missing variables’ that compensate for the fundamental variables’ volatility under fixed exchange rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant compensating variable.     

Canada and the IMF: Trailblazer or Prodigal Son?

Canada played an important role in the establishment of the IMF, yet in 1950 it was also the first major member to abandon the Bretton Woods par-value system in favour of a flexible exchange rate. Canada’s trail-blazing experience demonstrated that a flexible exchange rate can operate in stable and effective manner under a high degree of capital mobility. Equally important, it showed that monetary policy needs to be conducted differently under a flexible exchange rate and capital mobility. In 1962, Canada returned to the Bretton Woods system as a “prodigal son”, after a period of controversial monetary policy. This paper critically analyzes the interaction between Canadian and IMF officials regarding Canada’s exchange rate policy in view of the economic circumstances and the prevailing wisdom at the time. It also examines the impact on IMF research and policy because the Canadian experience influenced the work of Robert Mundell and Marcus Fleming, resulting in the development of the Mundell-Fleming model. Thus, the Canadian floating rate experience not only had important implications for the IMF and the Bretton Woods system, but also for macroeconomic theory and policy in open economies.     

Is there an Anglo-American corporate governance model?

This paper questions the existence of an Anglo-American model of corporate governance and capitalism. Significant differences between the UK and US models of corporate governance are identified. The UK is a principles orientated system based more on voluntary codes operated on a ‘comply or explain’ basis, whilst the US system is more rules based and litigious. The UK focuses more on ex ante protection of ‘outside’ shareholders, whilst the US focuses on ex post protection of share traders. Institutional investors are expected to play a more prominent and wide ranging role in corporate governance in the UK than the US, though the evidence on their voting behaviour and wider ‘engagement’ activity is not readily available. The explosion of private equity led leveraged buy-out activity in the mid 2000s challenges the efficiency of both models and could be a harbinger of a ‘new capitalism’; relying more on incentive compatible remuneration packages and less on public disclosure and market discipline. Alternatively, it could simply be driven by the tax advantages currently enjoyed by debt over equity, the special deferred capital gains (‘carried interest’) tax treatment enjoyed by private equity, low (long as well as short term) real interest rates (‘cheap money’), and rising equity prices.     

Negative nominal interest rates: history and current proposals

Given the renewed interest in negative interest rates on base money—or equivalently ‘taxing money’—as a means for overcoming the zero bound on short-term nominal interest rates, this article reviews the history of negative nominal interest rates starting from the ‘taxing money’ proposal of Silvio Gesell up to current proposals that received popular attention in the wake of the financial crisis of 2007/2008. It is demonstrated that ‘taxing money’ proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step, the article points out that besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates.     

Keynes's Approach to Money: An Assessment After Seventy Years

This paper first examines two approaches to money adopted by Keynes in the General Theory. The first is the more familiar ‘supply and demand’ equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even Post Keynesians utilizing Keynes's ‘finance motive’ or the ‘horizontal’ money supply curve adopt similar methodology. The second approach of the General Theory is presented in Chapter 17, where Keynes drops ‘money supply and demand’ in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of money's role in constraining effective demand. In the penultimate section, I return to Keynes's earlier work in the Treatise on Money as well as the early drafts of the General Theory to obtain a better understanding of the nature of money. I conclude with policy implications.     

How Influential is Economics?

Economists often claim that their discipline has a great influence on the economy. An analysis of the existing literature reveals, however, that little convincing empirical evidence exists. The two approaches used are subject to major shortcomings. The ‘Economics Production Function’ relating the input of economic ideas to economic outcomes, is faced with major estimation problems. The ‘Revealed Behaviour Approach’ of choosing to study economics is based on very restrictive assumptions. It is argued that the ‘Case Study Approach’ analysing specific policy instances constitutes a more promising avenue and should be undertaken to identify more general patterns of influence.     

Surges and Sudden Stops of Capital Flows to Emerging Markets

A characteristic of many of the recent emerging market currency crises is a preceding surge in capital inflows and their reversals or ‘sudden stops’ during the crises. The empirical investigation of 38 emerging market economies between 1990 and 2003 reveals that a surge in capital inflows significantly increases the probability of a sudden stop. In addition, a surge accompanied by a high current account deficit or an appreciated real exchange rate is more likely to be associated with a sudden stop. The paper also finds that a surge that is dominated by private loans and portfolio flows rather than direct investment has a higher probability to end with a sudden stop.     

Decomposition of GDP Growth in Some European Countries and the United States

Summary  The composition of economic growth can be analyzed in two different ways. In the ‘traditional method’ for the decomposition of GDP growth, total imports are deducted from exports. This approach underestimates the importance of exports for the growth in GDP, and overestimates the importance of domestic expenditure categories. In the alternative methodology proposed in this paper, imports are allocated to all expenditure categories. Although this ‘import-adjusted method’ is more complex than the ‘traditional method’, it has the considerable advantage that the contributions of the expenditure categories to GDP growth provide a better understanding of why GDP growth decelerates or accelerates. The methodology and data requirements for calculating the import content of final demand, and the implications for the decomposition of real GDP growth, are discussed. For six European countries and the United States, the paper shows that applying the alternative methodology provides rather a different economic story.      

Zwevende wisselkoersen

Summary It is shown that the most important advantages of fluctuating exchange rates (full employment; protection against the import of inflation; optimal international specialisation) as well as the disadvantages of this system (instability of the economy; inflationary pressure; hampering international economic relations) only have a limited validity. On the other hand the advantages of fixed exchange rates (promoting international trade; impeding internal inflation) and its disadvantages (larger unemployment; import of inflation) have no more general validity. A crawling peg does not give a solution for fundamental disequilibria and a widening of the band implies a more difficult task for the authorities. Fluctuating exchange rates always leave open the possibility of ‘dirty floating’. An adjustable peg with rules for swift adjustment for deficitand surplus countries might well give the best solution.     

Is Numérairology the Future of Monetary Economics?

The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numéraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numéraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numéraire (‘sterling’) and the means of payment (‘drachma’). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numéraire used in private transactions. The second is the proposition that price stability in terms of that numéraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numéraire from the currency: doing away with currency altogether—the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numérairology—the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.

Exchange Rate Regimes and Reserve Policy: The Italian Lira, 1883–1911

The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I — the gold standard (1883–1893), floating rates (1894–1902), and “gold shadowing” (1903–1911)—produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy’s performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy’s variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamentals and consistent policies.     

Energy sanctions and the global economy: mandated vs unilateral sanctions

International Economics and Economic Policy - The world is witnessing an unprecedented episode of ‘economic warfare’, with more than 30% of global GDP (the G7’s share) pitched...     

Aspirations,reference groups and the consumer

Summary In this article it has been possible to give an explanation for the existence of nonsymmetrical Slutsky matrices and nonhomogeneous demand functions. For this purpose a relation was made with a number of sociopsychological theories regarding reference groups and aspiration levels. Following the approach of Lakatos, a ‘hard core’ was chosen from within the traditional theory concerning the market behavior of consumers. In particular, this article used the maximization process. The newly constructed theory, based on this ‘core’, appeared to have more content than the traditional theory. With this result an important requirement of Lakatos' approach was met. I should like to thank Professor A. Bosman for his valuable advice and stimulating criticism. Thanks are also due to Mr. R.E. Vercruijsse who translated this paper and to Mr. R.A. Meyer who checked the mathematics. I also benefited from the comments of an anonymous referee.     

Employment and export specialisation along the development path: some robust evidence

This paper contributes to the literature on the evolution of overall specialisation along the process of economic development by simultaneously estimating ‘specialisation curves’ emerging from fully comparable employment and export statistics in a sample of 32 economies (1980–2000). We apply semiparametric estimation methods, which allow us to combine the flexibility of the estimation with the inclusion of country-specific effects, demonstrating that their omission can be the source of contradictions in nonparametrically revealed patterns of diversification along the path of growth. We find no strong support for a U-shaped pattern (which is very sensitive to the methodological setting applied) but rather a robust tendency towards manufacturing despecialisation in the initial phase of economic growth that is confirmed both by export and employment specialisation patterns.     

The optimal exchange rate regime for a small country

This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada’s (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank’s policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains “Fear of floating” and “Fear of pegging”.     

Microfoundations and Hicksian monetary theory

Summary John Hicks was the first economist to use a general equilibrium framework as a foundation for a dynamic macroeconomic analysis. A critical assessment of his work in this area is used to evaluate the contributions of the ‘micro-foundations’ discussions of the 1970’s. It is noted that Hicks’s starting point, the question of the role of money in a general equilibrium framework, is precisely where the current debate has arrived some fifty years later. This delay, and the foundations debate, were due in large part to Hicks’s own attempts to interpret Keynes’s theory in terms of his own, original framework. Suggestions and comments from P. Davidson, O. Steiger, and the editor, as well as the participants of seminars in the University of Bremen and the Economics Institute of the Faculty of Statistics of the University of Rome are acknowledged without implication of responsibility.     

Een dynamisch duopoliemodel II

Summary This paper is a continuation of ‘A Dynamic Duopoly Model’ (De Economist, 1970, pp. 458–490). According to the argument given in that paper, each duopolist changes his price twice in each period: first, there is an autonomous change, and, secondly, an induced one to neutralize the effect of the autonomous price change of the other duopolist. In the present paper, however, it is assumed that both duopolists change their prices only once a period. These ‘combined’ price changes are partly autonomous and partly induced; only the duopolist himself could tell in how far they are autonomous or induced. The steady state solution of this model corresponds with the endogenously determined duopoly solution of the earlier investigations.     

Urban Economic Development and Restorative Justice: Exploring the Relationship Between Creativity and Crime Control

This article examines the relationship between local economic development and a new approach to the problem of crime–i.e., ‘restorative justice.’ The latter concept is introduced and briefly explored, followed by a short review of Richard Florida's recently proposed theory of creative-class economic development. Against the backdrop of these theoretical innovations, an empirical question that arises is whether the specific character of creative-class economic growth enhances the probability that a given city will adopt a restorative justice paradigm in its efforts to reduce crime. Addressing this question using logistic regression analysis, the article provides preliminary evidence that creative-class economic development encourages experimentation with innovative approaches to social problems such as crime. Missouri Western State University—U.S.A. This article is a revised version of a paper presented at the 58th International Atlantic Economic Conference in Chicago, Illinois, October 8, 2004.     

Exchange rates in the modern floating era: what do we really know?

Forecasting nominal exchange rates remains a remarkably difficult task, despite the proliferation of new floating currencies, the maturation of the floating rate period, the deepening of financial markets, and the development of more sophisticated econometric tests that make use of today’s more powerful computing possibilities. Despite these advances, the basic results of Meese and Rogoff in the 1980s stand up remarkably well—it is still extremely difficult to forecast exchange rates. To the extent that there is any forecasting power, the most promising models are those based on purchasing power parity or the current account, although it must be noted that these mainly predict the real exchange rate, rather than the nominal exchange rate. Thus, some of the adjustment takes place in prices. Finally, it should be noted that panel methods help in exchange rate forecasting, albeit mainly by allowing better estimation of nonstructural factors such as shift parameters.

Slow Pass-through Around the World: A New Import for Developing Countries?

Developing countries traditionally experience pass-through of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of pass-through and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete pass-through is no longer exclusively a luxury of industrial countries. Using a new data set—prices of eight narrowly defined brand commodities, observed in 76 countries—we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the pass-through coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in pass-through to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment—including a fall in long-term inflation. Real wages work to reduce pass-through to competitors’ prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the pass-through coefficient in some developing countries.