Trade and Payments Adjustment under Flexible Exchange Rates: Papers of the Second Annual Conference of the International Economics Study Group

272 Pages·1979·21.95 MB·English

by  John P. Martin

TRADE AND PAYMENTS ADJUSTMENT UNDER
FLEXIBLE EXCHANGE RATES
Also published for the Trade Policy Research Centre by Palg rave Macmillan
TowARDS AN OPEN WoRLD EcoNOMY
by Frank McFadzean et a/.
WORLD AGRICULTURE IN DISARRAY
by D. Gale Johnson
THE EssENTIALS OF EcoNOMIC INTEGRATION
by Victoria Curzon
NEGOTIATING ON NON-TARIFF DISTORTIONS OF TRADE
by Robert Middleton
TRADE EFFECTS OF PuBLIC SUBSIDIES TO PRIVATE ENTERPRISE
by Geoffrey Denton, Seamus O'Cleireacain and Sally Ash
INVISIBLE BARRIERS TO INVISIBLE TRADE
by Brian Griffiths
TECHNOLOGY AND ECONOMIC INTERDEPENDENCE
by Harry G. Johnson
THE ECONOMICS OF THE OIL CRISIS
edited by T. M. Rybczynski
PuBLIC ASSISTANCE TO INDUSTRY
edited by W. M. Corden and Gerhard Pels
MEETING THE THIRD WORLD CHALLENGE
by Alasdair MacBean and V. N. Balasubramanyam
AGRICULTURE AND THE STATE
edited by Brian Davey, T. E. Josling and Alister McFarquhar
PRICE ELASTICITIES IN INTERNATIONAL TRADE
by Robert M. Stern, Jonathan Francis and Bruce Schumacher
TARIFF PREFERENCES IN MEDITERRANEAN DIPLOMACY
by Alfred T ovias
NUCLEAR POWER AND THE ENERGY CRISIS
by Duncan Burn
NORTH SEA OIL IN THE FUTURE
by Colin Robinson and Jon Morgan
Trade and Payments
Adjustment under
Flexible Exchange
Rates
Papers of the Second Annual Conference of the
International Economics Study Group
Edited by
JOHN P. MARTIN AND ALASDAIR SMITH
M
for the
Trade Policy Research Centre
London
©Trade Policy Research Centre 1979
Softcover reprint of the hardcover 1st edition 1979 978-0-333-21705-4
All rights reserved. No part of this publication may be
reproduced or transmitted, in any form or by any means,
without permission
First published 1979 by
THE MACMILLAN PRESS LTD
London and Basingstoke
Associated companies in Delhi
Dublin Hong Kong Johannesburg Lagos
Melbourne New York Singapore Tokyo
British Library Cataloguing in Publication Data
International Economics Study Group
Annual Conference, 2nd, Isle of Thorns, 1977
Trade and payments adjustment under flexible
exchange rates
1. Foreign exchange-Congresses
I. Title II. Martin, John P. III. Smith, Alasdair
IV. Trade Policy Research Centre
332.4'5 HG3821
ISBN 978-1-349-03321-8 ISBN 978-1-349-03319-5 (eBook)
DOI 10.1007/978-1-349-03319-5
This book is sold subject
to the standard conditions
of the Net Book Agreement
TO THE MEMORY OF HARRY G. JOHNSON (1923-1977)
International Economics
Study Group
The International Economics Study Group (IESG), administered by the
Trade Policy Research Centre, London, from 1975 to 1978 is one of
several study groups in economics supported in the United Kingdom by
grants from the Social Science Research Council. The IESG was
founded on the initiative of Max Corden and David Wall in 1972, the
founding committee also including John Dunning, Brian Hindley, Tim
Josling and the late Harry G. Johnson. Through the programme of eight
or nine regular seminars in the academic year, held at the London
School of Economics, and an annual conference each September, held
at the Isle of Thorns, University of Sussex, the IESG provides a forum in
which professional international economists in British universities,
polytechnics, government departments and business can meet and
discuss research papers presented by members and visiting faculty from
abroad. The Committee for 1977-78 included John Black, Chairman;
David Wall, Secretary; Brian Hindley, Alasdair Smith and Alec
Chrystal.
vii
Contents
International Economics Study Group vii
List of Tables xiii
List of Figures XV
Biographical Notes xvii
Abbreviations xix
Introduction xxi
1 OPTIMAL FoREIGN ExcHANGE MARKET INTERVENTION WITH
RATIONAL ExPECTATIONS
Willem Buiter
Prices Versus Quantities
Rules Versus Discretion 2
Results 6
Notation 7
I The Simplest Model 8
The Fixed Exchange-rate Regime 11
The Freely-floating Exchange-rate Regime 12
The Specification of the Loss Function 14
Optimal Closed-loop Exchange-rate and
Reserve Management Policies 15
The Optimal Exchange-rate Management Policy 16
The Optimal Reserve Management Policy 18
Non-rational Expectations 20
Alternative Specifications of the
Objective Function 22
II A Model with an Explicit Domestic Financial Sector
~
III A Model with International Financial Flows
IV Conclusion 30
ix
X Contents
2 RIGID REAL WAGEs AND INTERNATIONAL EcoNOMIC PoLicY 38
Brian Hindley
An Open Economy Model 43
Concluding Comment 53
3 AssET-MARKET DETERMINATION OF ExcHANGE RATES: INITIAL
EMPIRICAL AND PoLicY REsuLTS 55
William H. Branson and Hannu Halttunen
I Theoretical Model 56
Short-run Determination of the Exchange Rate 56
Short-run Asset-market Equilibrium 56
Short-run Stability 57
Short-run Comparative Statics 58
Dynamic Adjustment of the Exchange Rate 60
II Empirical Verification of the Short-run
Exchange-rate Model 62
Estimating Equation for the Exchange Rate 62
The Sample Period and Data 65
Empirical Results 67
Exchange Rates ($/domestic currency) 67
Exchange Rates (OM/domestic currency) 71
Summary of the Initial Empirical Results 75
Purchasing Power Parity and Demand for Money 75
Some Extensions of the Estimating Equation 79
III Use of the Model for Policy 80
4 MODEL OF AN INDUSTRIAL CoUNTRY UNDER FIXED AND
FLEXIBLE EXCHANGE RATES 86
Malcolm D. Knight and Donald Mathieson
I The Basic Structural Model 87
II Effective Exchange Rates and Rest-of-the-world
Variables 100
III Estimation Work 102
5 THE SENSITIVITY OF INDUSTRIAL OUTPUT AND EMPLOYMENT
TO ExCHANGE-RATE CHANGES 120
Alan V. Deardorff, Robert M. Stern and Mark N. Greene
I The Model 122
Equations of the Model 123
Derivation of Functional Forms 128
Application of the Model 132
Contents xi
II Effects of Exogenous Exchange-rate Changes 135
The Export Effect 135
The Import Substitution Effect 138
The World Price Effect 138
The Inter-industry Sales Effect 139
The Inter-industry Purchases Effect 139
The Expenditure Effect 139
III Multilateral Exchange-rate Changes 141
IV Other Exogenous Changes 143
V Conclusion 147
6 A Two-PARAMETER pURCHASING-POWER-PARITY MEASURE
OF ARBITRAGE IN INTERNATIONAL GOODS MARKETS 152
Stephen P. Magee
I A Two-parameter Definition of International
Market Arbitrage 154
Measure 1: Variance in the International Price Deviations 155
Measure 2: Periodicity in the Deviations 156
Case 1: Perfect and Near-perfect Arbitrage 160
Case 2: Trend in d 161
Case 3: An AR(1) Process 162
II Arbitrage and Adjustment under Fixed and
Floating Rates 162
Fixed versus Flexible Rates, Efficiency
and Trade Adjustment 165
Comparative Goods-market Efficiency 168
Historical Arguments over Fixed versus
Floating Rates 169
Why Did the Deviations Increase in the
Floating Period? 169
Floating Rates and Monetary Independence 170
7 CuRRENCY oF INVOICING AND FoRWARD CovERING: RisK
REDUCING TECHNIQUES IN BRITISH FoREIGN TRADE 174
Stephen Carse and Geoffrey E. Wood
Exchange-control Restrictions 175
Sources of Risk 176
Exploitation of Risks 177
Hypotheses to be Tested 178
Tradeables I and Tradeables II 180
Testing the Hypotheses 182