Portfolio stock adjustment and the real exchange rate: The Dollar-Mark (DM) and Mark-Sterling

The advent of “freely floating” exchange rates in the 1970's coincided with the emergence of what is known as “monetary” or “asset” models of exchange rate behavior where exchange ratesmove to equilibrate demand for stocks of monies. The fundamental monetary model assumes purchasing power parity holds in the long-run, and therefore exchange rates are determined by the same factors that determine relative prices, to wit, money stocks, real incomes, and nominal interest rates. Though early proponents of the monetary view clearly emphasized its long-run nature, empirical testing has by and large neglected this caveat. Thus a model developed for long-run equilibrium exchange rates has instead been tested many times over on short-run equilibrium rates. The latter require a distinct model of their own. This paper develops a short-run equilibrium exchange rate model based on deviations of the short-run exchange rate from its long-run equilibrium. The model differs in that all variables are cast in real terms. It also differs in that the monetary and current account exchange rate versions are shown to be subsets of the more general wealth/portfolio framework used here. The present model considers, in addition to stocks of monies, stocks of foreign assets, and stocks of domestic wealth.     

Hungary in transition: a computable general equilibrium model comparison with Austria

We approach the problem of Hungary's transformation from a partially centrally planned to a market-oriented economy with a cross-country comparison using two computable general equilibrium (CGE) models of Hungary, 1977 and 1986, and one of Austria, 1976. These three models represent a continuum of small open economies and allow a “quasidynamic” analysis using static CGE models. We examine two types of transformation issues: external (trade liberalization, import price reductions, and redirection of foreign trade; “Dutch Disease reversal”) and internal (decreases in subsidy levels). Overall, it is clear that with Hungary's borrowing constraints, liberalization should not be pursued in isolation; a change in the tax structure is necessary at the same time. The results for Austria indicate that liberalization brings smaller welfare improvements accompanied by smaller increases in the current account and government deficits.     

A phased increase in the U.S. investment rate: Sacrifice times, T-year gains, and investment rate returns

We simulate a phased increase in the U.S. investment rate using a translog production function with technical progress (disembodied and/or embodied). We assume there will be an absorption lag implying that factors are underutilized during the transition to a higher investment rate. We find that the “sacrifice time” (the time that elapses until consumption surpasses the value it would have had under the initial investment rate) is roughly nine years. Across alternative specifications, phase-in periods, and absorption lags, the sacrifice time varies from seven to 13 years, and is insensitive to the percentage increase in the investment rate. With a three-year phase-in of a 20 percent increase in the investment rate with a one-year absorption lag, the average “ecade gain” in output (the percentage gain at the end of a decade) is roughly 4 percent; the decade gain in consumption, 0 percent; the five-decade gain, 10 percent in output and 6 percent in consumption; and the “investment rate return” (the internal rate of return on a permanent increase in the investment rate), 13 percent.     

Explaining third-party success in gubernatorial elections: The cases of Alaska, Connecticut, Maine and Minnesota

In the 1990s alone, four states elected third-party governors. Walter Hickel of Alaska and Lowell Weicker of Connecticut were elected in 1990. Maine elected Angus King in 1994. And Jesse Ventura was elected governor of Minnesota in 1998. In this article, I examine these four cases in an attempt to identify the factors that contribute to third-party electoral success. I apply two models to these cases. The first model, “alternative culture,” holds that certain voters—regardless of specific context—are predisposed to support alternative candidates. The second model, “institutional context,” looks at factors such as name recognition, resources, and access to media as explanations of third-party success. I find that except for the influence of “partisan independence,” there is little evidence to support the persistence of an alternative culture of third-party voting. Rather, these four cases are linked by a context particularly favorable to these alternative candidates.     

Multicountry dynamic multipliers under fixed and floating exchange rates: An econometric analysis

The present paper attempts to analyze the dynamic multiplier effects of fiscal monetary policies for developed countries in a consistent framework of a global econometric model under both fixed and flexible exchange rate regimes. The paper first discusses the estimation of exchange rate functions for eight developed countries with special reference to “fundamentals” in economic performance such as international gaps in inflation, productivity, expected real rate of return, and so on. The results are then incorporated into the global model to derive and compare dynamic multipliers under both fixed and flexible exchange rate regimes. “Insulation effects” are observed in most cases in terms of both output and inflation, though this differs according to the country. Policy implications are discussed at the end.     

Capital mobility among advanced countries

Mobility of capital has been studied by examining savings–investment correlations, real interest rates differentials, covered and uncovered interest parity, and equity home bias. All these examine the capital mobility question indirectly. This paper directly tests the return/total flow specification of the Mundell–Fleming model. It finds that while portfolio equity and debt flows are, direct investment is not; and in every case, the inclusion of direct investment makes the aggregative-capital variable unresponsive to interest rates. Asset-based exchange rate models may benefit by looking at the composition of cross-border assets, countries can have independent monetary policies with full capital mobility, and macroeconomic policy trilemma for open economies disappears.     

Does inflation targeting matter for output growth? Evidence from industrial and emerging economies

This paper examines the effects of inflation targeting (IT) on output growth over the “globalization years” of 1986-2004. Employing static panel data methods that control for traditional growth determinants, trade openness and financial globalization, the paper finds that the adoption of a fully fledged IT regime results in higher output income per capita for industrial and emerging economies. However, under dynamic model specifications, the estimated long-run output impact of inflation targeting for emerging market economies is found to be lower than in the case of static models. We argue that this might be due to the long lags until the full effects of greater credibility are felt in the real economy and the fact that emerging market economies adopted the regime much later than industrial economies.     

What accounts for China''s trade balance dynamics?

This paper proposes a structural VAR model which extends the frameworks of Hoffmaister and Roldós [Hoffmaister, A. W., & Roldós, J. E. (2001). The sources of macroeconomic fluctuations in developing countries: Brazil and Korea. Journal of Macroeconomics, 23, 213–239] and Prasad [Prasad, E. S. (1999). International trade and the business cycle. Economic Journal, 109, 588–606]. The model is then used to analyse the sources of China's trade balance fluctuations in the period of 1985–2000. Efforts are made to distinguish the forces which underlie the long-run trend in trade balance from those with transitory impacts. The effects of four types of shock are examined—the foreign supply shock, the domestic supply shock, the relative demand shock and the nominal shock. Among other findings, two emerge as important. First, the movements in China's trade balance are largely the result of real shocks. Second, the Renminbi is undervalued, yet changes in the exchange rate bear little on the trade balance. Therefore, monetary measures would not suffice to redress China's trade ‘imbalance’.     

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.     

Pollutant emissions,energy use and real output in Sub-Saharan Africa (SSA) countries

Industrialisation is pivotal to growth sustainability and this requires intense energy use that may invariably trigger pollutant emissions thereby necessitating some evidence-based policy concerns. This study therefore examines the dynamic connection among pollutant emission, energy use and real output per capita in SSA. Owing to cross-sectional dependence, the Prais-Winsten model with panel-corrected standard error (PCSE) alongside the panel spatial correlation consistent (PSCC) approach is applied and key findings are established. First, the EKC hypothesis holds and this is striking for both oil-rich and oil-poor SSA countries. Second, energy use induces pollutant emissions in oil-rich SSA countries but not in oil-poor SSA countries. Third, pollutant emissions and energy use are real output per capita-enhancing in SSA generally and in oil-poor countries. Thus, policy measures to safeguard efficient optimisation of energy use in ensuring a balance as well as developing SSA’s rich renewable energy sources is imperative for long-run growth.     

Capital goods imports and long-run growth: Is the Chinese experience relevant to developing countries?

In this paper, we analyze the role played by capital goods imports in the long-run growth of developing countries. We focus in the case of the Chinese economy in the last few decades. We find evidence that the ratio of imported to domestic capital goods, that is, the composition of investment, as well as the capital accumulation (both physical and human), was key determinants of the long-run growth rate of per capita GDP over the analyzed period. Furthermore, our results are also consistent with the hypothesis that the link between trade openness and long-run growth operates mainly through imports. This finding supports some recent developments of Schumpeterian models of growth, and the very specific economic policy recommendations arising thereof. In short, these models state that, in the early stages of growth, government intervention to encourage an investment-based strategy, with emphasis on large investment efforts and the adoption of foreign technology, could be an appropriate strategy for development.     

On the predictive power of the term structure of interest rates for future inflation changes in the presence of political instability: the Turkish economy

This study investigates whether the term structure contains useful information about future inflation for Turkey during 1990–2000, a period of high inflation, high budget deficits, and political instability. Constant parameter and time varying parameter models are rejected by the data. The relationship between term structure of interest rates and inflation changes is found to be explained by a time-varying-parameter model with Markov-switching heteroskedastic disturbances. Thus, the term structure of interest rates is limited as a guide for monetary policy in an economy subject to regime changes such as that of Turkey. Stability can be achieved only by reducing inflation through circumscribing substantial government budget deficits and the political instability underlying them.     

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.     

The Euro, income disparity and monetary union

This paper looks at the impact of the UK joining the Euro on compatibility between the UK and the Euro zone. We construct a theoretical model to capture such effects, and then estimate the model using data from the period 1980–1999 (the period covering the existence of the ECU and the Euro). Particular attention is paid to the actual dynamics of the system and the important roles of monetary and fiscal policy. We find that the dynamic path of the UK and Euro members is stable and that UK monetary policy is in line with that of its Euro zone neighbours in a way that would be close to that expected if the UK were already a member of the Euro zone.     

Governance structures of socially complex knowledge flows: Exchange, entitlement and gifts

The intangible aspects of knowledge transfer in multinational corporations (MNCs) continue to be a crucial area of research in social science research and raise the issue of knowledge governance structures. The purpose of this conceptual note is twofold. Firstly, we believe that there is more than one governance structure for successful knowledge transfers and flows. We provide a typology of three governance structures: “exchange,” “entitlement,” “gifts.” Secondly, most MNCs will need to take advantage of all three or a combination of these three socially complex governance structures.     

Five ways to ration capital: The case of a developing economy

The performances of two programming models and three “simple” investment rules, the benefit-cost ratio, internal rate of return, and present value to constrained cost ratio, are compared in solving a four-year capital rationing problem in a Latin American nation. The properties and advantages of the various approaches are discussed and policy conclusions are drawn. In addition, the effects of including project timing variants and political/ bureaucratic constraints are explored.     

Economic growth, poverty, and the international agencies

During the past few years, the international agencies have been playing down economic growth as the main road to the elimination of poverty and emphasizing the role of asset and income redistribution. The latest reflection of this attitude is the so-called “basic needs” approach. This essay attempts to demonstrate that where economic growth has been sufficiently high and sustained, it has been a powerful means of alleviating poverty. Growth has not “failed”; there is simply not enough International agencies should be cautious in advocating redistribution, for the results .     

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.     

Minsky and Keynes on speculation and finance

Is Hyman Minsky's “Financial Instability Hypothesis” actually an interpretation of Keynes General Theory? Yes and no. Yes, they both describe an economy dominated by monetary forces in which employment and output dance to the expectations of financial players via speculation. But, no, they do not contain the same analytical structure. Keynes' theory specifies static positions of equilibrium. Minsky's analysis investigates the dynamic processes of the business cycle. Minsky's work might be viewed as the business cycle theory Keynes hinted at, but never completed.