Exchange rate theories

Summary A four-period classification is used to categorise recent exchange-rate theories or models. In the very short period, only capital flows are relevant. In the short period, both capital flows and payments on the current account play a role. In the long period, the capital account and the current account are individually in equilibrium. In the very long period, purchasing power parity holds. Cash-in-advance models are dealt with separately. Many models that purport to explain exchange rates do in fact not provide for the exchange of currencies. No model stands up satisfactorily to econometric testing. Speculative bubbles, the peso problem and news play havoc with tests of the uncovered interest parity theorem, the core of the monetary models. This aside, the fundamental assumption of rational expectations itself is suspect. There does not seem to be such a thing as a true model.I am indebted to Dr. W.J.B. Smits and Professor J.W. Gunning for helpful discussions on a number of issues pertinent to this article.     

Game equilibrium modelling

Summary Non-cooperative game theory has in recent years become one of the main tools in the social sciences and economics. It deals with decision problems of more than one (rational) player. The actions of those players result in outcomes that are the best that may have happened to a player, given the actions of the other players. This is precisely the content of the 'Nash equilibrium' concept. It would be nice when each game had a unique Nash equilibrium. Unfortunately, both non-existence and multiple equilibria occur. An important role in game theory is played by the information available to the players. Among the economic applications are: the Theory of Industrial Organisation, Bargaining and the Economic Theory of Information.Comments by Eric van Damme and Casper de Vries on an earlier draft of this paper have greatly improved the presentation. I have benefited from the comments of the editor and an anonymous referee ofDe Economist. For all omissions, all possible errors and the revealed views in this paper, I alone am responsible.     

Forward exchange,short term capital flows and monetary policy

Summary This paper re-examines the relationships between short term capital flows and monetary policy, in the light of a new theoretical approach of the forward exchange market. They contend that the traditional forward exchange market theory is a misleading one as it fails to give all the importance it deserves to the distinction between covered and uncovered exchange transactions and to the actual role of the arbitrageurs. As a consequence of this analysis, they demonstrate that the problem of monetary management in an open economy must be dealt with in a way different from what has been usual, and they conclude that monetary policy, central banks' intervention on the foreign exchange market and direct controls on capital movements can still have some efficiency in the struggle against inflation, either of the domestic or the imported type.     

The Dutch Transportation System in the nineteenth Century

The actual discussion on the Betuwe-line and the construction of this new railway for freight transportation from Rotterdam to Germany is placed into a historical perspective. Right from the beginning of railway history in the Netherlands, the construction of an Iron Rhine was disputed. As analytical tool, the social saving approach is used. The conclusion of this cost-benefit analysis is that it did not and does not matter that much for the level of welfare in the Low Countries or the Rhineland whether the goods from major coastal ports are transported on the river Rhine or by the four Iron Rhines.     

International mass migration: A threat to Europe's borders and stability?

Summary Western Europe has become an epicentre of international migration. Theoretical considerations about the onset and persistence of international migration flows suggest that major inflows over extended periods would result if the migration process would be allowed to unfold in a natural fashion. However, massive migratory inflows would put severe strains on the receiving countries and, consequently, the governments will resist them. A systematic examination of current entry gates shows that these gates have already narrowed down considerably. From that perspective mass migration does not, at the moment, seem to offer a serious threat to Western Europe's borders or stability. Nevertheless, for the longer term a largely administrative response to the phenomenon of increased migration pressure is likely to be inadequate. Those politically responsible should re-establish their primacy in this area of policymaking, and should insist on a Western European approach which is neither altruistic nor harsh, but seeks to combine humanitarian and socio-economic considerations in a way acceptable to both the major sending and receiving countries. Setting quota would have to be an essential element of that new approach.     

Post- war European economic development as an out of equilibrium growth path. The case of the Netherlands

The paper examines a number of aspects of post-war economic development of the Netherlands in the light of recent out of equilibrium growth theory. It contains a comparison of the stylized facts of the long run performance of the economies of the United States and the Netherlands which suggests that the US has been on an equilibrium growth path for more than a century, but that the Netherlands followed a radically different growth path, especially after 1945. It is attempted to explain this erratic behaviour of the investment ratio and the wage share after 1945 by examining two aspects more in detail: the financing of the acceleration of growth after 1945 and the phase of too rapid growth during the 1950s and 1960s, when the growth of the demand for labour tended to be higher than the increase in its supply.     

Testing Korteweg's rational expectations model for a small open economy

Summary Korteweg extended the Barro, Lucas, Sargent, Wallace type of rational expectations model to a small open economy. This paper tests Korteweg's model with Dutch data. A major error in the specification and estimation is pointed out and corrected: the differenced expected variables are not defined consistently. This error implies that Korteweg's and Bomhoff's previous empirical results on the model are invalid. The test results for the corrected model indicate that this model has to be rejected for The Netherlands. The restrictions implied by an extremely simple empirical alternative are, however, not rejected.I would like to thank Dr. Th.E. Nijman, Professors F. van der Ploeg, W.H. Buiter and J.J.M. Theeuwes and Dr. A. J. de Zeeuw for their stimulus and helpful comments on previous versions of this paper, and Professor P. Korteweg for his open-minded attitude towards this research. Responsibility for the contents remains, of course, with the author. Financial help, from the Stichting Bekker-La Bastide-Fonds and the Stichting A.A. van Beek-Fonds is gratefully acknowledged.     

Rational spirits and the post Keynesian macrotheory of microeconomics

Summary The argument that post Keynesian theory rejects rationality and maximization as a basis of agent behaviour and is thus non-rational and lacking micro-foundations is contrasted by reference to Keynes' use of his early work on probability in the General Theory. Instead of presuming rational choice over perfectly known events, post Keynesian theory builds on Keynes' explanation of agents' rational beliefs in uncertain propositions about their knowledge of the world. These rational spirits lead to the recognition of the macro constraints to individual action or a macrofoundations of microeconomics linked to the role of money and to the role of liquidity preference as both a measure of rational belief and a determinant of money prices which equate the rates of return on all existing and newly produced goods. In this equilibrium prices will generally diverge from costs of production, in contrast to perfect competition but in concordance with the post Keynesian microeconomic theories of mark-up pricing.Comments by L. Hoogduin are gratefully acknowledged. He is relieved from any responsibility for my impressionistic presentation of Keynes' views on probability.     

Tax Level and Tax Internalization Effects on Union Wage Bargaining

High taxes and generous social benefits are often blamed for causing unemployment. The conventional view is that if taxes on labour are (too) high, jobs will be lost and that generous social benefits will exert an upward pressure on unions' wage claims. In the case where unions co-ordinate their wage bargaining strategy, this need not be the case. A simple model is used to illustrate the effects of the tax rate level and tax internalization on unions' wage bargaining strategy. A high marginal tax rate along with endogeneity of the average tax rate shifts the union's trade-off between wages and employment in favour of the latter. These shifts may have contributed to the success of the so-called polder model or tulip model of the Netherlands.     

Substitution assumptions versus empirical evidence in manpower planning

Summary There exist basically two manpower planning methodologies. Firstly, the manpower requirements approach which stipulates that there are needs in the economy for given numbers of qualified persons in the labour force. Secondly, the rate of return approach which focuses on the costs and benefits of producing one extra qualified person at the margin.This paper contrasts the theoretical foundations of the two approaches with particular emphasis on the degree of substitution between different types of educated labour. The empirical evidence on elasticities of substitution is reviewed and it is concluded that the cost-benefit model fits better the real world.I am indebted to Dr. Christopher Dougherty for reading a draft of this paper and making many important corrections.     

The infant industry argument for protection: A reevaluation

Summary Despite its importance as an exception to the free trade case, the argument for infant industry protection has only sporadically been subjected to close theoretical scrutiny. This article helps to fill this gap by evaluating the various traditional and modern perceptions of the topic. The paper concludes that none of the existing formulations of the infant industry theory are fully satisfactory. The classical view on the argument seems too static and too restrictive, whereas the modern approaches fail to provide a convincing theoretical framework. The proposed reappraisal of the infant industry idea is based on the classical principle of comparative advantage, but places the argument in the dynamic context of modern theories.     

Economische politiek en verbeeldingskracht naar een zesde fase in het proces van economische groei

Summary The M.I.T. report for the Club of Rome tries to indicate the limits of economic growth. The thesis submitted by the report requires us to reconsider the concept of economic growth that we have been handling during the last decades. Galbraith's thesis on the Affluent Society makes a reconsideration of the concept of growth more acceptable. What is necessary is not really slowing down growth but modifying the structure of the growth process. All this requires a clear picture of the society that we prefer: an enlightened utopia. The modification of the structure will cause such discontinuities in the growth process as to add a sixth stage to the five stages of economic growth that have been suggested by Rostow.Rede, uitgesproken bij de aanvaarding van het ambt van gewoon hoogleraar in de staathuishoudkunde aan de faculteit der sociale wetenschappen van de Nederlandse Economische Hogeschool, Hogeschool voor Maatschappijwetenschappen te Rotterdam op donderdag 12 oktober 1972.     

International dollar liquidity and the Eurodollar market

Summary Transactions of Eurodollar banks affect international dollar liquidity (and the US payments balance) exactly as would identical transactions of US banks. Eurodollar banks are, however, usually more likely to grant credits to foreigners than US banks, and thus to raise foreign gross (thought not net) dollar liquidity. In times of international dollar glut, an expansion of the Eurodollar market (e.g., through shifts of deposits from US to Eurodollar banks or through US banks repaying Eurodollar borrowings) thus tends to aggravate unwanted dollar flows to foreign central banks and the US reserve transactions (though not the net liquidity) payments deficit.This paper is a by-product of the author's contribution to the study Foreign Dollar Balances and the International Role of the Dollar, conducted jointly with Professor Raymond F. Mikesell and sponsored by the National Bureau of Economic Research. Neither Professor Mikesell nor the National Bureau (nor the Foreign Service Institute) bears, however, any responsibility for the views expressed in this paper.     

The perspective of the SDR's position in monetary reserves on the robustness of optimal portfolio results

Summary To gain an empirical impression of the SDR's attractiveness as a reserve asset, an amended mean-variance analysis is applied to official reserves. The main amendments bear upon the choice of the numeraire and the rejection of both the capital market line and the effective yield's positive marginal utility-frequently assumed in empirical analysis. Comparison of the outcome with that recently obtained by Ben-Bassat shows a large sensitivity of optimal portfolio results for slight differences in assumptions. A second, substantial kind of sensitivity of an asset's position in a portfolio appears to ensue from the influence of other competing functions of reserves.The authors are Professor and Assistant Professor of International Economics, University of Amsterdam, The Netherlands. The research of the second author was financially supported by the Netherlands organization for the advancement of pure research (Z.W.O.), no. 46-108. This research is part of the project Exchange-rate and monetary policy in international dependence. The paper was presented earlier at the conference Research in international finance, Jouyen-Josas, France (June 19 and 20, 1986). Computational assistance by Jeannette Capel, Reiner Gratama, and Martin O. Nijkamp and comments by an anonymous referee are gratefully acknowledged.     

Cash Management, Payment Patterns and the Demand for Money

We analyse cash management and payments behaviour using 1990–1994 panel data for Dutch households. The results largely confirm the transactions demand for money theory, including an income elasticity of substantially less than one, and they are consistent with the hypothesis of technology resulting in households' economizing on currency balances. The results indicate up to 40 per cent lower transactions balances in the future, which is affirmed by direct questioning on future expectations. The effect on total money outstanding is considerably lower, due to significant amounts of missing money in hoards, which are insensitive to new developments in the payments system.     

The golden rule of accumulation and the open economy

Summary This paper examines the factors which determine the volume of consumption per capita in a small open economy in the long run. The analysis is based on a neoclassical model. It is proved that-in general — Phelps' golden rule of accumulation does not hold for an open economy. This conclusion follows from the decline in the terms of trade, which is generated in an open economy by an increase in the share of investment. The influence of labour supply and world expenditure on the consumption per capita also depend heavily on the induced change in the terms of trade. The analytical results of the model are illustrated by means of a few numerical examples.This paper is written within the framework of the research program Possibilities and Limitations of National and International Economic Policy, code K.H.T. XIII-85-44.     

Smoke of leets

Summary This is a review of some of Mrs. Joan Robinson's ideas, and the author's conclusion is that these ideas do not contribute to the present state of economic theory. Her view on international trade is lopsided, her criticism of traditional capital theory goes too far, her refutation of income distribution theory is mainly unfounded. Basically, Mrs. Robinson rejects the notion of relative scarcity of capital; the author believes that this is a useful notion in economics. Moreover, her recent work shows a strong anti-empiricist tendency. If Mrs. Robinson's negative train of thought were to be applied to all concepts of macro-economic theory (total labour force, real national income etc.) these concepts would vanish in thin air. The whole of macro-economics might go up in smoke.     

Public pensions and political decision-making

Summary A simple decision-making model regarding the financing method and benefit level of a public old age pension is developed. In line with existing literature, the decision-making process is supposed to be in the form of direct democracy, initially, In order to apply the model to a situation of a representative democracy, to wit the Netherlands, five social groups are considered which may be assumed to influence the decisions taken by the government organization. The empirical results show unanimous support for the PAYG system actually chosen at the start of the pension scheme in 1956. The results are highly suggestive, furthermore, as regards the fact that the financing method of the pension scheme has recently become a parliamentary issue. If one endorses the view that long-term considerations should be given a more preeminent place in this context, which would demand a change of the decision-making structure in favour of the young, then the political support for such a change would seem to be present at the moment.The research reported in this paper is part of the project Economic Policy and Conflicts of Interests of the University of Amsterdam (PEPCI paper 85.03). Helpful comments by Professor P. Hennipman and by participants in the workshop on The Origin and Future of Social Security Schemes at the Wissenschaftszentrum Berlin, December 13–14, 1984, in particular by Professor Charles Blankart, are gratefully acknowledged.     

Economic resilience: A two-country analysis

Summary Countries differ with regard to labour-market flexibility and animal spirits of entrepreneurs. The paper aims at an analysis of the consequences of these differences in a climate favourable to economic growth. For that purpose a two-country model is presented in section 2. Although wealth variables are taken into account, expectations are assumed to be static. Despite this simplification the model cannot be solved analytically. The role of a dynamic region (USA) versus a more passive region (Europe) is therefore studied by working through numerical examples.I am indebted to Ir. A. Markink for his invaluable assistance in all computations and to Professor S.K. Kuipers, Mr. A.B.T.M. van Schaik and Mr. J.H.M. Donders for comments on a previous version of the paper.     

Economische orde,economische politiek en sociale politiek

Naar aanleiding van een bundel opstellen van dr J. Zijlstra, Economische Orde en Economische Politiek, H. E. Stenfert Kroese N.V., Leiden 1956, 143 blz. en een bundel opstellen van dr G. M. J. Veldkamp, Economische Orde en Sociale Politiek, H. E. Stenfert Kroese N.V., Leiden 1957, 156 blz.