Exchange Rates,Expectations, and Monetary Policy: a NOEM Perspective*

We use a dynamic general‐equilibrium optimizing two‐country model to analyze how the formation of exchange rate expectations shapes the effects of a monetary policy shock in an open economy. We also provide empirical evidence on how traders in foreign exchange markets form exchange rate expectations. Our model implies that the short‐run output effect of a permanent monetary policy shock diminishes if “technical traders” form the type of regressive exchange rate expectations we find in our empirical analysis. If the influence of technical traders is strong enough, a permanent expansionary monetary policy shock can result in a temporary decline of the output in the country in which it takes place. The output effect of a temporary monetary policy shock is magnified when technical traders form regressive exchange rate expectations.     

A Case for Managed Exchange Rates*

The incorporation of adaptive expectations by Dornbusch in a Mundell-Fleming model modifies significantly the traditional results of policy effectiveness in a small, open economy. While monetary policy is still able to influence aggregate demand when flexible exchange rates prevail, the effects of this policy on other important variables in the economy during the adjustment process to a new equilibrium may be considered sufficiently ‘disruptive’ so that the authorities will be hesitant to use their only fully-effective policy instrument for income-stabilization purposes. However, by adding a target level for the exchange rate to their list of goal variables and by using an appropriate mix of monetary and fiscal policies, it appears to be possible for the government to avoid these disruptive side effects.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

The Macroeconomics of Financial Crises: How Risk Premiums and Liquidity Traps Affect Policy Options

The paper offers an overview of what structural models of the IS-LM and Mundell-Fleming variety can tell about the macroeconomics of economic crises. In addition to demonstrating how the emergence of risk premiums in money and capital markets can generate liquidity traps at positive interest rates and may drive economies into recessions, it shows the following: (1) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (2) Near the fringe of liquidity traps, there may be perfect traps, in which neither monetary nor fiscal policy works when used in isolation but policy coordination is called for; and (3) Massive financial crises in the domestic money market may even destabilize the economy.     

Macroeconomic policy and aggregate fluctuations in a semi-industrialized open economy: Greece 1951–1980

In this paper we model the effects of macroeconomic policy in a semi-industrialized open economy. Greece is our case, but the model could apply to other similar economies with tightly controlled financial markets and comprehensive foreign exchange restrictions, where both the exchange rate and interest rates are administered prices. The model consists of three equations which determine output, the price level and the trade balance. It is largely non-Keynesian, but, through the real exchange rate, it allows for anticipated monetary policy to affect real output. The model is estimated by FIML and its various restrictions cannot be rejected. A policy simulation suggests that even Friedman's x% money growth rule would ensure greater macroeconomic stability in the 1970s than the monetary policy that was actually followed.     

汇率-资本流动性的制度安排和财政-货币政策的有效性研究

笔者通过拓广的蒙代尔-弗莱明模型,并突破了传统的"三元冲突"汇率制度安排理论的研究路径,考虑引入资本流动性相对强度系数的概念,又在固定汇率制下引入"冲销"干预政策因素,提出了一个在固定和浮动汇率及不同资本流动性制度安排下财政-货币政策有效性指数曲线的新假说,对汇率-资本流动性制度安排对于宏观经济政策(财政-货币政策)综合有效性的影响问题做了一些较为深入的探讨.笔者认为,我国作为一个经济大国应尽可能地拥有宏观经济政策的自主权,考虑到我国当前金融市场体系尚不够完善,货币政策传导机制还存在严重障碍,所以在近期财政政策的权重应大于货币政策,从而在我国汇率制度改革过程中,为保留宏观经济政策的自主权,在加快放宽人民币汇率弹性的同时必须加强相应的资本管制.     

Monetary shocks,exchange rates and trade balances: Evidence from inflation targeting countries

This paper investigates the relationship among monetary policy shocks, exchange rates and trade balances in five Inflation Targeting Countries (ITCs). The investigation is based on Structural Vector Error Correction Models (SVECMs) with long run and short run restrictions. The findings reveal that a contractionary monetary policy shock leads to a decrease in price level, a decrease in output, an appreciation in exchange rate, and an improvement in trade balance in the very short run. Our findings contradict the findings of price, output, exchange rate and trade puzzles that have been found in many empirical studies. Furthermore they are consistent with the theoretical expectations regarding the effect of a contractionary policy. The only long run restriction that we imposed on our models is that money does not affect real macroeconomic variables in the long run, which is consistent with both Keynesian and monetarist approaches.     

The role of fiscal policy in the St. Louis model: Nonparametric estimates for a small open economy

This paper reevaluates the efficacy of monetary and fiscal policies and bidirectional causality between income and each of the policy instruments used in the St. Louis model for aggregate demand using nonparametric (or infinite parametric) spectral methods. We proceed by estimating the strength of the correlations (or partial coherences) between income and each of the policy instruments over various frequencies. Then we obtain the corresponding band regression and Hannan's efficient estimates of both the lead and lag coefficients in the St. Louis model. The analysis is carried out with seasonally adjusted quarterly data and is divided into the flexible, fixed, and managed flexible exchange rate regimes. We find that while estimates from parametric regressions yield the standard conclusions for the St. Louis model, results from the nonparametric analysis are quite different. Specifically, the results of our analysis reveal that (i) both monetary and fiscal instruments are strongly correlated with income over cycles of 10 quarters or longer for the most recent period of the managed flexible exchange rate regime, and (ii) bidirectional causality exists between income and the fiscal policy instrument. These results suggest that both monetary and fiscal policy have a long-lasting effect on aggregate demand and that bidirectional causality exists between income and policy instruments. An explanation for the existence of bidirectional causality might be that the Canadian government generally pursued a purposeful discretionary fiscal policy during the post-World War II period. Furthermore, it appears that discretionary policy action may have been anticipated by rational, farsighted, and forward-looking economic agents. Finally, our results for the flexible exchange rate and fixed rate regimes are in agreement with the Mundell-Fleming view of the role of monetary fiscal policy in an open economy.     

Monetary disinflation in a simple two-country model

A two-country model with sluggish goods and labour markets, efficient financial markets, flexible exchange rates and perfect capital mobility is considered. The rational expectations dynamics are considerably simplified when the effects of real interest rates on investment are small. It can then be shown that simultaneous monetary disinflation has no real effects, whilst independent disinflation leads to output losses at home and gains abroad.     

RE-EXAMINING THE EFFECTIVENESS OF STABILISATION POLICY

This paper develops an alternative international macroeconomic model for evaluating the effectiveness of fiscal and monetary policy in stabilising national income under fixed and floating exchange rates. It encompasses national output and income, saving, investment, money and capital flows and linkages between the exchange rate, price levels and real interest rates consistent with international parity conditions. It demonstrates that the nature of government spending is pivotal to the effectiveness of fiscal policy, revealing that, ceteris paribus , higher public consumption expenditure contracts national income and depreciates the exchange rate, whereas higher productive public investment spending has opposite effects. The framework also shows that the effectiveness of fiscal and monetary policy as macroeconomic policy instruments is not ultimately dependent on the exchange rate regime.     

The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?*

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two‐country New Keynesian DSGE model, incorporating non‐Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non‐Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country‐specific shocks does not suggest potential inter‐country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility.     

Optimal monetary and fiscal policies in a search theoretic model of monetary exchange

Search models of monetary exchange commonly assume that terms of trade in anonymous markets are determined via Nash bargaining, which generally causes monetary equilibrium to be inefficient. Bargaining frictions add to the classical intertemporal distortion present in most monetary models, whereby agents work today to obtain cash that can be used only in future transactions. In this paper, we study the properties of optimal fiscal and monetary policy within the framework of Lagos and Wright (2005). We show that fiscal policy can be implemented to alleviate underproduction while money is still essential. If lump sum monetary transfers are available, a production subsidy can restore the efficiency of monetary equilibria. The Friedman rule belongs to the optimal policy set, but higher inflation rates are also possible. When lump-sum monetary transfers are not available, equilibrium allocations are generally not first-best. Nevertheless, fiscal policy still results in substantial welfare gains. Money can be extracted from circulation via a sales tax on decentralized market activities, and the Friedman rule is only optimal if the buyer has relatively low bargaining power.     

Exchange rate expectations and economic policy uncertainty

This study provides a new angle on the relationship between political decisions and exchange rates. We link a conventional exchange rate modeling approach to the literature on the political economy of exchange rates and studies dealing with the role of policy announcements for financial market expectations by addressing the impact of policy uncertainty on exchange rate expectations and forecast errors of professionals. Our results show that expectations are not only affected by announcements but also by the degree of uncertainty regarding the future stance of economic policy. We find that forecast errors are strongly affected by policy uncertainty compared to expectations, suggesting that the effect of uncertainty is not efficiently accounted for in market expectations. Our main findings hold for economic policy uncertainty, fiscal policy uncertainty and monetary policy uncertainty. In addition, the estimates for the Japanese yen suggest a safe haven role of the yen since higher policy uncertainty in the US results in an expected appreciation of the yen.     

Fiscal Policy,Expectations, and Exchange-Rate Dynamics*

This paper uses the sticky-price monetary model to analyze the effects of fiscal policy on the exchange rate under alternative assumptions about exchange-rate expectations. the use of different expectations mechanisms-specifically the perfect-foresight model and the popular models tested by Frankel and Froot: regressive, adaptive, and distributed-lag-is based on recent empirical evidence suggesting that exchange-rate expectations may not be rational. the most surprising finding in the paper is that with adaptive and distributed-lag expectations, fiscal expansion has no initial impact on the exchange rate, and the same may be true for regressive expectations.     

Have budget deficits and money growth caused changes in interest rates and exchange rates in Canada?

This paper examines empirically the causal impact of monetary and fiscal policy on exchange rates and interest rates in Canada using a six-by-six vector autoregressive (VAR) model with variable lag structure. The results suggest that changes in the base money and budget deficits have no direct causal effects on exchange rates, a finding consistent with the monetary explanation that exchange rates follow a random walk. Also consistent with the Ricardian equivalence hypothesis, the results reveal no direct effect of budget deficits on interest rates, casting doubts on the crowding-out phenomenon for Canada. In contrast, changes in the base money unidirectionally cause changes in interest rates, implying some support for using interest rates as a key intermediate policy target for the Canadian monetary authorities.     

汇率制度与宏观经济政策环境——以加拿大为例

加拿大属于典型的资源性经济,加元的汇率变化多受国际商品和石油价格的影响,超出了国内货币政策的控制范围,是独立浮动或是固定汇率？经过两次试验后,加拿大政府坚定地选择了独立浮动汇率制度,并最终实现了汇率政策与货币政策脱离,以此给予了加拿大银行较大的决策空间,使后者专注于维持较低的通货膨胀环境。同时,加拿大政府努力为汇率制度创造有利的宏观经济政策环境,财政政策和货币政策分工明确、相互支持,为汇率制度和经济增长奠定了可持续的坚实基础。本文以加拿大浮动汇率制度为主线,从财政政策、货币政策、政策搭配角度讨论其宏观经济政策框架,分析加元汇率制度的运行环境。在此基础上,本文探讨加拿大汇率政策及浮动汇率制度的作用与功能。本文第五部分对加拿大银行提出的汇率预测模型作出了较深入的分析。     

Policy analysis with a macroeconomic model of Korea

This paper reports on a macroeconomic model of Korea. The model consists of markets for output, prices and labour, the balance of payments and money, and emphasizes in its structure the openness of the economy. A complete listing of the model equations and statistics of its performance are presented. The paper then discusses both the external and internal policy impacts on main domestic economic conditions, on the basis of the multipliers obtained for changes in fiscal, monetary, exchange rate policy instruments and changes in foreign economic activity and interest rates.     

Cross-country evidence on determinants of fiscal policy effectiveness: the role of trade and capital flows

This article studies the determinants of size differentials between fiscal multipliers in countries around the world, both advanced and developing economies. We introduce variables not considered before for explaining multiplier size differentials, such as capital flows and the openness of capital markets, while controlling for domestic conditions and exchange rate regimes. We also disaggregate GDP into its main components in order to identify the channels through which external and internal factors can influence GDP after a change in fiscal policy. Our results point to the existence of a new channel through which fiscal policy effectiveness is affected. Capital flows, especially FDI flows, play an important role in determining the sizes of fiscal multipliers, and a country’s external conditions largely explain GDP changes after fiscal expenditure shocks. Our results also point towards a strong link between a country’s international position and its real economy.     

Inflation in Open Economies with Complete Markets

This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country’s terms of trade of securities, central banks choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.     

关税、货币政策与中国实际均衡汇率

加入WTO后 ,降低进口品关税等措施将影响人民币均衡汇率水平 ,同时开放经济下国内货币政策、财政政策等宏观经济政策调整也会改变均衡汇率水平。本文运用动态一般均衡的方法 ,探讨中国在加入世界贸易组织之后 ,关税税率调整、货币供应量增长率改变、财政政策调整等措施对实际均衡汇率的长期效应。把货币引入生产函数和消费者的效用函数 ,我们扩展了由Turnovsky提出的两商品资本积累模型 ,利用参数赋值(calibration)的方法进行了均衡状态下的比较静态分析。研究发现降低进口品关税使人民币面临贬值压力 ,而政府增加税收 ,减少对贸易品的消费则有利于人民币的保值和升值。实证研究结果表明 :国外实际利率水平下降 ,实际货币供应量增长率降低都将引起人民币均衡汇率贬值。