An analysis of the welfare implications of alternative exchange rate regimes: An intertemporal model with an application

This paper develops a methodology for evaluating the short-run welfare implications of different exchange rate regimes. Heterogeneous, optimizing domestic consumers live for two periods, consume goods and leisure, supply labor, save home and foreign bonds, and demand currency. Firms maximize profits. The home government levies taxes, issues money and bonds and supplies public goods. The foreign country demands imports, supplies exports, and lends to the home country. The theoretical model is estimated for Australia. Counter-factual simulations are carried out. The results suggest that floating was, or would have been, the superior regime for the 1981–1984 period.     

The Simplest Dynamic General-Equilibrium Model of an Open Economy

This paper presents the simplest possible general-equilibrium model of an open economy in which producer and consumer decisions are both intra- and intertemporally consistent. Consumers maximize the present value of the utility of consumption; producers maximize the present value of profits. The model solves for the set of intertemporally consistent prices. The parsimonious structure of the model is achieved by dividing the economy into two producing sectors—exports and domestic goods—and two consumed goods—imports and domestic goods. As a result, there is only one endogenous price per period to be solved for (the price of the domestic good), although “structural” questions, such as the evolution of the real exchange rate, can be posed with the model. Furthermore, with this structural breakdown, the model can be calibrated with national accounts data only. In the paper, we show how to calibrate such a model (including specification of an adjustment-cost function, to avoid “bang-bang” behavior) and use the model to examine various questions where intertemporal issues are important, including terms-of-trade shocks and tariff reform.     

Do broad money, output, and prices stand for a stable relationship in India?

This study investigates the stability of the relationship among M3 money, output, and prices. The empirical results derived from conventional stability tests, cointegration and error correction models and a test for structural break in a cointegrating vector provide evidence for the existence of a fairly stable relationship among these variables during 1951–1952 to 2000–2001. The evidence suggests that the growth of M3 money can be used as one of the potential indicators of future movement in prices within the multiple indicators framework of the Reserve Bank of India (RBI). However, evidence regarding the short run dynamic adjustment among these variables indicates that active monetary policy to stabilize short run fluctuation in prices must be handled with caution, as it would amplify rather than moderate price fluctuations in the long run.     

Policy simulations with a macroeconometric model of the Indian economy

In this paper, the results of various dynamic policy simulations are analyzed within the context of a macroeconometric model of the Indian economy. The model contains 35 equations and offers a consistent framework for policy analysis. It is considerably expanded on the side of the fiscal sector and usefully incorporates the interdependence between monetary and fiscal sectors and gives due attention to supply side considerations. Magnitudes of effects of sustained policy changes are analyzed for the period 1964–1965 to 1974–1975. Impact multipliers and elasticities are also analyzed. Government expenditures variables and deficit financing are shown to have substantial impact on the system whereas changes in tax-rates, discount-rates, and liquidity ratios for commercial banks are shown to have only a marginal impact. The model is used for exploring the growth potential of the economy in a forecast period of five years under alternative assumptions regarding policy options.     

Are Subsidies to be Blamed? A Reexamination of U.S. Countervailing Duty on Hog Imports From Canada

A dramatic increase in U.S. hog imports from Canada triggered a successful countervail action against Canada in 1985, and resulted in an import tariff. This paper finds Canadian subsidies were not a major factor explaining increased hog exports, rather, the depreciation of the Canadian dollar played a larger role. More importantly, we find that hog imports from Canada did not “injure” the U.S. industry. These results imply the U.S. hog countervail duty was the outcome of rent-seeking activities rather than due to economic factors.     

A world iron and steel economy model: A projection for 1980–1995

This article presents an aggregate global model that projects steel markets for the period 1980–1995, with particular attention to investment in production capacities. The model is developed as a linear complementarity programming problem. The model distinguishes between newly constructed steel mills and average mills to characterize price formation and quantity balances respectively. Various validation tests of the model are discussed.     

Non-tariff barrier on chicken imports into Russia: Impact on production,trade and prices

We analyze the Russian restriction on chicken imports as an example of a non-tariff barrier (NTB). Cointegration test results support the hypothesis that the NTB limited trade. We calibrate an equilibrium market model to cointegration results to assess the market impact. The tariff equivalent of the Russian chicken NTB is estimated to be 30 − 40% depending on the representation of consumer demand. Removing the NTB decreases domestic production by 4–5% and domestic price by 27%–34%, while imports increase by 326–423 thousand tons annually in 2015–2019.     

A small forecasting model of the world oil market

An annual, small-scale econometric model of the world oil market was developed to analyze oil market conditions and oil prices for the period 1986–1991. The model determines the oil price by a market-clearing condition, given world economic activity and the strategic supply behavior of the OPEC core countries. The effects of OPEC production cut in 1987 upon oil prices are evaluated, and alternative oil price profiles are provided. A simulation experiment suggests that if the OPEC core is pressed to defend the OPEC share in oil supply, then wide price swings may become inevitable.     

Protectionism: An analysis from project LINK

The LINK system of world trade is used to examine present tendencies toward protectionism. In protectionist scenarios we increase the prices of manufactured imports into 13 LINK-OECD countries by 5, 10, and 20 percent respectively, for 1978–1979. If a country's import equations do not depend significantly on relative price, we impose corresponding quantitative import restrictions of 5, 10, and 20 percent. Smaller OECD countries, developing countries, and socialist countries are assumed to be nonprotectionist in these scenarios. The discrepancies between the values of leading variables in the protectionist scenarios and in a baseline case show the effects of the different degrees of protectionism assumed. The results describe and validate Adam Smith's principles of the gains from free trade.     

The impact of the Soviet Union upon the U.S. feed/livestock sector— An assessment

In this article, the impact of volatile Soviet Union corn imports on the U.S. feed/livestock sector is analyzed using an econometric model. The model's attention to supply response when feed price changes enables it to determine the nature of the effect of exogenous shocks across feed and livestock sectors. The model is used in historical simulation to demonstrate the effects of actual and alternative paths of variable Soviet import demand and to explore the difficulties of deriving a stabilizatior policy for these linked sectors.     

Short run responses to foreign exchange crises

This paper constructs a short-run general equilibrium model for an LDC-type economy. Some key features are the possibility of excess capacity and the presence of quantitative restrictions on exports and imports. A rich variety of pricing possibilities for tradeable goods is allowed for, including “water in the tariff” as well as domestic prices exceeding world prices with binding import quotas.The model is used to analyze alternative responses to a foreign-exchange crisis. Import controls, devaluation and cuts in government expenditures are compared. We find that: i) import quotas can worsen the balance of trade, ii) rationing foreign exchange for noncompetitive imports is stagflationary, increasing prices even under excess capacity, iii) a devaluation has strong effects on income distribution, although output and employment expand, and iv) cuts in government spending are deflationary but the income distribution effects are neutral.     

An econometric model of the agricultural sector of the Indian economy

The interrelationships between production, consumption, and stocks are studied in an interdependent framework for two groups of agricultural commodities, namely foodgrains and nonfoodgrains, with a view to obtain policy guidelines for agricultural growth. The model is formulated with aggregate information over the period 1951–1975 and both static and dynamic simulation along with multiplier analysis are carried out to assess the performance of the model. The study reveals that if there had been no PL 480 aid from the U.S. imports, foodgrain prices would have been higher than observed prices. Ex-ante forecasts to 1985 suggest some need for adequate planning with regard to stockbuilding.     

On Primary Commodity Prices: The Impact of Macroeconomic/Monetary Shocks

The hypothesis of a long-run quantifiable relationship between non-oil primary commodity prices and macroeconomic/monetary variables—focusing industrial production and effective exchange rate of the US dollar—is tested by cointegration technique using quarterly data for 1970q2–93q3. This confirmed equilibrium adjustment explains the origin of the observed coincidence of commodity price variations with the fluctuations of macroeconomic/monetary variables. An error correction specification, including interest rate, is therefore applied to estimate the observed disequilibrium prices of commodities in the context of steady-state solutions. This instantaneous adjustment explains why commodity prices have fluctuated more strongly over the last 2 decades than before.     

Welfare effects of demand management policies: Impact multipliers under alternative model structures

This paper explores the sensitivity of multiplier estimates under three alternative assumptions about factor supply. For this purpose, we have used a general equilibrium model of Malaysia which allows endogenous determination of factor and output prices and which permits substitution in both production and demand in response to price. The structure of the model and three alternative factor supply assumptions under which the model can be solved are described. These alternative assumptions amount to alternative “closure rules.” The results of a general increase in demand as estimated under each of the alternative closures are then presented. Finally, we examine the results of two specific types of demand increase under each of the closure rules, focusing especially upon welfare related variables such as real household consumption levels.     

Aspects of a new world development strategy II: Factors affecting the long-term prospects of developing nations

This paper explores some quantitative dimensions of the interdependence of rich and poor regions in the context of the United Nations World Model. It extends the original work on that model in three ways: (1) by updating some of the key parameters and exogenous variables in the light of recent data; (2) by developing a “control” solution to be used as a point of reference in policy simulations; and (3) by exploring the sensitivities of each of two groups of regions— developed and developing—to changes in one another's growth rates. Goals of closing the income gap between developed and developing regions and of increasing income levels in the latter are discussed.     

技术应用的社会基础:中国近代机器缫丝技术应用的比较研究

在近代中国，主要集中在长江三角洲和珠江三角洲地区的机器缫丝技术的应用，带来了植桑养蚕和缫丝的专业分化以及职业分化：农民向工人的转变。研究发现，在长三角地区，专业分化发生在城市和农村之间，且表现为一种利益冲突型结构的变革。在新的社会结构中，传统蚕区成为纯粹的原料供应地，蚕农和士绅等群体利益受损，因而售蚕茧并抵制机器缫丝技术的应用。而在珠三角地区，专业分化则发生在家庭内部和乡村内部，蚕农和士绅等利益相关群体能够从技术应用中获益，因而积极支持机器缫丝技术的应用。在珠三角地区，机器缫丝技术应用所建构的社会结构也主要表现为一种利益共享型结构，而技术应用所建构的这种利益共享型结构又极大地促进了技术的应用。     

Calibrating Hypothetical Willingness to Pay Responses

Experimental data comparing hypothetical and real dichotomous choice responses for two different goods were used to estimate a statistical bias function to calibrate the hypothetical yes responses. The probability that a hypothetical yes response would be a real yes response was estimated as a function of the individual's self-assessed certainty of the hypothetical yes response (assessed on a 0–10 scale) and a variable representing the price level. Without calibration the hypothetical yes responses significantly exceeded the proportion of real yes responses, but after calibration the null hypothesis of no difference between hypothetical and real responses could not be rejected in any of the experiments.     

Money, real output, and deficit effects of coffee booms in Colombia

This paper develops a Vector Error Correction (VEC) model and uses the recently developed technique of ‘generalized’ impulse response analysis to test the empirical relationships in the Colombian economy between coffee revenues and a set of macro variables. We find that coffee price (revenue) shocks have exerted an important influence on money growth, inflation, and real exchange rates, and the direction of these effects are in line with some of the predictions of traditional Dutch Disease type models. The major difference between our results and the results of Dutch Disease type models arise in the effects of coffee booms on real output. We find that in the time horizon of 5 years after the boom, real output has increased in response to the effects of the coffee boom. The finding that coffee booms can result in positive long-run output effects is an important finding since it contradicts the traditional conclusion of Dutch Disease type models which envision an adverse long-run effect on output. We also find that the long-run effect of coffee booms is to reduce both current account and government deficits. These results illustrate strikingly that the term “Dutch Disease” is an unfortunately pejorative term that obscures the fact that coffee booms need not be viewed as a “disease” but as an extraordinary opportunity to strengthen internal and external balances.     

A macroeconomic potential describing structural change of the economy

For the purpose of describing change in an economy's structure, and addressing issues of transformation, the notion of a time-dependent macroeconomic potential function is introduced. It penalizes deviations from equilibrium (entrepreneurial error) and induces moves toward equilibrium. Thus, from the concept of a potential function is derived the concept of short-term and long-term change forces. We focus here on the long-term structural changes of an economy as distinct from short-term cyclical variations, and we represent economic transformations as phase-transitions between monostable and ambiguous bistable states of the economy. One important feature of the potential function approach is that the parameter of the potential can be determined from empirical data. In particular, the parameters can be regressed for input variables. Hence, a relationship has been established between the structural change force and a set of input variables, some of which are controlled in part by either public or private sector agents. The method has been applied to West German and United States industry data for 1950–1980.     

Three models of OPEC leadership and policy in the aftermath of Iran

Collapse of the Shah's regime has transformed Iran's attitude regarding oil production policy. The nature of OPEC leadership is changing as well. Three models examine the nature of this leadership inside OPEC: (1) the conventional price leadership model, (2) a model emphasizing a concept of egalitarian leadership, and (3) a team model composed of coalitions. The three models establish the limits within which OPEC leadership is exercised. A composite model drawing upon all three sets of results suggests that Saudi Arabia shapes cartel policy not by itself, but through a dominant coalition of states. For most of the period 1969–1978 this coalition has been stable. Following the unsettling changes of 1973, cooptation of Iran into the dominant coalition in 1974 was an important step in achieving a new level of stability. But during the turbulence of regime transformation in Iran, the nature of the governing coalition appears to have changed. One consequence may be that in the future Saudi Arabia will yield more willingly to arguments heard within OPEC on behalf of upwards price pressure, especially in an atmosphere of growing political isolation and overall tight supply.