INTEREST RATE VOLATILITY AND EXCHANGE RISK: NEW RULES FOR A COMMON MONETARY STANDARD

How does the choice of an exchange rate regime influence the volatility of interest rates? Are floating exchange rates useful “shock absorbers” that dampen fluctuations in domestic interest rates and prices or do they create additional risk that increases interest rate volatility and segments the international capital market? The answers are best seen in historical perspective.     

ECONOMIC AND BUDGET ISSUES FOR DEFICIT POLICY

Much of the controversy about reducing the federal deficit has arisen because policymakers lack a deficit policy that is a consistent part of broader macroeconomic policy. This is not surprising since economists have not reached a consensus about such a policy.
This paper sketches the analytical controversy about monetary and fiscal policies and traces it to issues about how the economy works. Although aspects of the deficit question are controversial, there is general concern about the buildup of federal debt implicit in the projection of persistently large deficits. A growing body of research suggests that the increase in the federal debt-to-income ratio may impinge dangerously on the credit available to finance private capital formation. Also, the rising federal debt may indirectly generate inflation through monetization.
Several criteria and approaches to a deficit policy are identified. The paper suggests that changing the "policy mix" by tightening fiscal policy and loosening monetary policy to reduce interest rates is unlikely to succeed to the extent that expansive monetary policy increases real interest rates by raising inflationary expectations and uncertainty.
Since the potential ill effects of the federal debt buildup, are essentially long-run and bear on capital accumulation, any tax increases should avoid disincentives to saving, investment, and to growth generally. Depending on revenue requirements, fundamental changes in the tax system may be necessary. Further reductions in spending appear to be inevitable if the projected rise in the debt-to-GNP ratio is to be halted. Defense, retirement, and medical care programs are most likely candidates for reduction.     

HEALTH-CARE COMPETITION: INTRODUCTION

Medicare expenditures increased 497 percent, federal medicaid expenditures 484 percent, and state and local medicaid expenditures 458 percent between 1970 and 1981. Private health-insurance premiums increased 329 percent, while patient direct payments rose 214 percent.¹ Although these results include quantity and price changes, Waldo and Gibson (1982) show that "price inflation has been a major factor in the increase in health-care spending." Moreover, health-care expenditures exceeded 10 percent of GNP (10.5 percent) for the first time in 1982 (Office of the Secretary 1983); the comparable figure in 1960 was 5.3 percent of GNP.
This rapid growth in price and quantity ("expenditures" or "costs"in the nontechnical literature) has raised a cry across the land for cost containment or increased competition in the health-care sector. Curiously, when one searches for a definition of "competition" in the same nontechnical literature, it is not immediately obvious what the word means.     

PERCEIVED RISK AND CONSUMER DECISION MAKING

The home economist has long been interested in effective family and consumer decision making and has tended to take a holistic or macro approach to decision theory. Recently, some applications of normative decision theory to consumer decision making—including the creation of rules for dealing with risk and uncertainty—have been advanced in home management textbooks. Since the early 1960s, consumer behaviour researchers in other disciplines have been developing a behavioural, micro-decision perspective centring upon the presence of perceived risk in the purchase decision of any customer. The empirical literature in home economics does not appear to have dealt with either of these perspectives. This paper identifies perceived risk as a useful analytical variable in the study of consumer product and store decisions and presents empirical data depicting the dual components of perceived risk and its four dimensions. The relationship of the normative and behavioural approaches to decision risk is discussed and implications for future research and application in home economics are identified.