Black-market exchange-rate expectations and the domestic demand for money: Some empirical results

This paper analyzes the effects of expectations about future exchange-rate adjustments on the demand for money. These effects are studied empirically for the case of countries which have imposed foreign-exchange restrictions. The results obtained for Brazil, Chile, and Colombia indicate that the demand for money is significantly reduced when expectations of black-market depreciation intensify; and that when this variable (for which the proxy used is the divergence of the black-market exchange rate from purchasing power parity) is omitted from the demand-for-money function, the response of the demand for money to changes in the expected rate of domestic inflation tends to be overestimated.     

The effect of excessively elastic expectations on exchange-rate volatility in the Dornbusch overshooting model

Bilson has described the empirical finding that the forward exchange rate overestimates the speed of return to equilibrium as a finding of ‘excessive speculation’, and has drawn implications for the volatility of the exchange rate. The present paper pursues this tack within the sticky-price monetary model made famous by Dornbusch. It is shown theoretically that if the market overestimates the speed of adjustment, the degree of overshooting is reduced. In this sense ‘excessive speculation’ leads to reduced volatility.     

Effective protection and exchange-rate determination

Considerable research interest has entered on the implications for exchange-rate determination of fluctuations in intermediate goods prices ang changes in tariff protection. This paper draws together the strands of this literature by examining the role of effective protection in exchange rate determination. A disaggregated portfolio balance model of the open economy is used to analyze the determination of real and nominal exchange rates in the presence of rational expectations. Additionally, it is used to explore the implications for resource allocation of changes in the effective rate of protection in a country capable of influencing its terms of trade.     

Choosing an exchange-rate system

The focus of academic discussions of exchange rate policy has shifted in recent years. The new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy. Arguments for exchange rate targeting are reviewed. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.     

High exchange-rate volatility and low pass-through

Two specifications of an open-economy model are shown to generate high exchange-rate volatility and low exchange-rate pass-through (ERPT). In the model, price discrimination causes ERPT to be incomplete in both the short and the long run. In the short run, a small amount of nominal rigidities is enough to reduce ERPT sharply; still, exchange-rate depreciation worsens the terms of trade, consistent with the evidence. Possible biases from omitted variables and measurement error in the ERPT empirical literature (due to data limitations) are investigated using model-generated time series. Estimates of ERPT coefficients can be quite different from true parameters, and are sensitive to the shocks driving the economies. Estimates can nonetheless detect key structural features of the models.     

Rational expectations,changing monetary policy rules,and real exchange rate dynamics

This paper reexamines the explanatory power of Taylor rule fundamentals for real exchange rate determination. We assume the agents know the time-varying parameters in central bank policy rules. The empirical results suggest that a monetary policy rule with regime switching is better able to explain the real Deutschemark/dollar exchange rate from 1976 to 1998 compared with a fixed-regime monetary policy rule. The findings show the importance of accounting for the expectation formation effect in changing policy rules as emphasized by the Lucas critique. Ignoring these effects can undermine the value of the rational expectations models.     

International risk sharing and the choice of exchange-rate regime

This paper examines the argument that the fixed exchange-rate regime should be preferred to the flexible rate regime because the former allows risk sharing across countries while the latter does not. The analysis is performed in a two-country overlapping generations model, where markets are incomplete under all exchange regimes. It is shown that risks are pooled across countries when the equilibrium exchange rate is constant across states of nature, which arises under the fixed rate regime with or without capital restriction, and under the flexible rate regime without capital restriction. Risks are not pooled across countries when the equilibrium exchange rate is different across states of nature, which arises under the flexible rate regime with capital restriction. But in a model with incomplete markets, the ability to share risk across countries in the regimes with constant exchange rates does not necessarily lead to higher welfare than the inability to share risk in the regime with random exchange rates.     

Achieving external and internal targets with exchange-rate and interest-rate intervention

This paper analyses how exchange-rate and interest-rate intervention rules can be computed so as to stabilize price and output and real exchange rate in the face of a variety of random shocks. The major finding is that there exist a unique optimal intervention rule for both internal and external targets in the face of all random disturbances except for LM and foreign interest rate disturbances.     

World trade patterns,economic disturbances,and exchange-rate management

This paper construct and analyzes a three-country stochastic model of world trade. the objectives of this paper are to investigate the propagation of economic disturbances worldwide and to analyze the nature of optimal exchange-rate management on the part of a single country faced with monetary and real disturbances accurring in all its trade patterns. The paper analyzes the roles of bilateral trade patterns, the type of underlying stochastic disturbances i.e. monetary vs real and transsitory vs permanent and of the optimality criterion, in determining the optimal exchange-rate regime.     

Optimal and time consistent exchange-rate management in an overlapping-generations economy

This paper analyzes exchange-rate management in a simple overlapping generations model. This framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage. When the chief concern is to provide a desirable store of value, a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate. The same is true when the government is concerned with maximizing total expected seigniorage, although more intervention is typically desirable when generating seigniorage is the major objective. When seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value, a national currency may not be viable in the absence of exchange controls. Such controls may be justified in this situation.     

Domestic and foreign disturbances in an optimizing model of exchange-rate determination

This paper analyzes the effects of various disturbances of domestic and foreign origin in a small open economy under imperfect capital mobility in which the behavioral relationships are divided from optimization by the private sector. In this model the domestic economy jumps instantaneously to its new equilibrium following a change in either the domestic monetary growth rate or domestic fiscal policy. In response to a disturbance in either the foreign interest rate or inflation rate, the economy undergoes an initial partial jump towards its new equilibrium, which it thereafter approaches gradually. The implications of these results for exchange-rate adjustments and the insulation properties of flexible exchange rates are discussed.     

深化汇率制度改革 提高市场流动性

法国巴黎银行是全球四家标普信用评级为AA＋以上的银行之一,在全球范围内设有30多个交易室、六个主要交易室;该行通过运用全球平台中较好的定价和风控技术建起了交易平台,在人员配备和技术准备等各方面为成为银行间外汇市场的做市商而积极努力。本刊特此采访了法国巴黎银行大中华区短期利率及外汇交易部主管胡凯毅先生。     

Does leaning against the wind improve exchange-rate performance?

This paper develops a model in which real disturbances cause the exchange rate to overshoot its new long-run equilibrium level because of speculative risk aversion combined with the well-known lagged effect of the exchange rate on trade flows. In this context, it is demonstrated that there exists an optimal degree of leaning against the wind, which stabilizes the exchange rate at the new equilibrium, but which requires the government to have accurate information about the exchange rate-trade flow lag. Without this information, leaning against the wind may increase the deviations of the exchange rate from its long-run level.     

Trade integration, competition, and the decline in exchange-rate pass-through

Over the past 20 years, U.S. import prices have become less responsive to the exchange rate. We propose that a significant portion of this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model featuring demand curves with variable elasticities so that a firm's pricing decision depends on its competitors’ prices. As a result, a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors, explaining a sizeable portion of the observed decline in the sensitivity of U.S import prices to the exchange rate.     

Demand for international reserves and exchange-rate intervention policy in an adjustable-peg economy

This paper develops and estimates a model of the joint determination of the official and black-market exchange rates, private and government demand for international reserves, and the rate of inflation under an adjustable-peg system. The framework presented combines and extends aspects of the monetary approach to the balance of payments and exchange-rate determination with the theory of the demand for international reserves. The role of expectations about devaluation is taken into account. The model is estimated by full-information maximum likelihood on the basis of quarterly data for Turkey.     

Adaptive expectations,rational expectations,and money demand in hyperinflation Germany

In the recent literature Sargent and Wallace (IER, June, 1973) have estimated the demand equation for money in hyperinflation under the restriction that the adaptive formula of Phillip Cagan yields rational inflation expectations in the sense of John Muth. The present paper finds evidence to reject for the Germany case the proposition that adaptive expectations are rational. The procedure employed is basically to overfit the stochastic representation for the inflation rate implied by the ‘adaptive-is-rational’ hypothesis. The paper also puts forward and applies a two-step procedure to estimate the important money demand elasticity in hyperinflation. The procedure returns reasonable results with large estimated standard errors.     

Misadjustment to anticipated shocks: an example of exchange-rate response

A simple model for a small open economy is used to illustrate a distinction between over(under)shooting and what is labeled as misadjusting responses of the exchange rate in this paper. If the relative price elasticity of the aggregate demand, d, is greater than 1, then the exchange rate misadjusts when the time interval between the date when the exchange is anticipated for the first time to the realization of the change is longer than a certain minimum, called the minimum lead time. If d is less than 1, then the exchange rate overshoots with sufficiently long lead time when a shift up of real output is anticipated.     

Optimal expectations and the extreme information assumptions of ‘rational expectations’ macromodels

‘One might reply that the rationality of a person's choice does not depend upon how much he knows, but only upon how well he reasons from whatever information he has, however incomplete. Our decision is perfectly rational provided that we face up to our circumstances and do the best we can.’ (John Rawls, A Theory of Justice)