Debt management in a small open economy: A theoretical and an empirical study for Belgium

This article analyzes the effects of debt management and its consequence for the control of base money in a small open economy (Belgium). The study compares the effects obtained from a small theoretical model with the results of a larger empirical model.The theoretical model focuses on the financing of government by money operation, on the bond rate, and on the international reserve of the Central Bank.The empirical model is a medium-term one, including the demand and the supply sectors of the economy and permitting simultaneous analysis of real and financial variables.The effects of an endogeneous or exogenous debt management have been studied by numerical simulation of modification in the public expenditure, the world trade, and the discount rate.     

The sensitivity of developing countries to external shocks in an interdependent world

North-South interdependence is illustrated by means of a general equilibrium model, in which the rural and urban sectors are treated entirely separately and urban real wages are downward rigid. We explain why such an approach may be more meaningful for long-run analysis than one that stresses the role of demand. The model's properties are illustrated by a theoretical analysis based on a simplified version of the system, and by simulations based on assumptions made by World Bank Staff in the 1983 World Development Report.     

Policy modeling of foreign exchange rates

This paper is neither a complete survey of empirical work on exchange rate determination, nor a review of the ballooning volume of theoretical models. It is instead an attempt to classify the main alternative approaches to modeling exchange rates. I shall concentrate on approaches that can be used to assess the effects of alternative policies. There will be four further sections in the paper. The first three sections will each deal withthe structure, empirical support, and policy consequences of three main types of model: purchasing power parity models emphasizing the close and immediate relation of goods markets; interest rate parity models emphasizing the close and immediate international linkage of markets for financial assets; and structural balance-of-payments models that do not assume either of the above linkages to be so strong and immediate as to eliminate the other, and that hence require separate (but interdependent) modeling of trade and capital linkages in the determination of exchange rates. Each of these main categories has many rather distinct models within it, and some models are not easily classified into one of the three categories; I hope that the three-way split will nevertheless serve to make some distinctions that are important for policy modeling.In the final section I shall try to summarize the available model results that pertain to national and international policy choices under a system of more flexible exchange rates, and then to suggest where more or better model building might usefully increase the amount of information available to guide policy decisions.     

Food security, consumption diversification and foreign exchange balances in Indonesia: Results from a multi-commodity simulation

Many countries adopt economic development strategies, within which an important element is the maintenance of low and stable food prices. In Indonesia, this is achieved principally through government subsidies to consumers of imported rice, the total cost of which fluctuates considerably from year to year, depending on world price movements and domestic production performance. Higher and possibly less stable domestic food prices appear inevitable in Indonesia, however, as the spectre of reduced oil revenues increases the government's concern with the cost of its food policy. Results from a stochastic simulation model of the agricultural sector show that the food price risk to which consumers and producers would be exposed in the absence of the stabilizing component of Indonesia's food policy would be considerable, rendering this component an unlikely area for significant change. A viable policy option appears to be the continuance of rice and wheat price stabilization, but with a graduated increase in the relative price of rice, reaching a total of 10% by 1985. Such a policy could result in net self-sufficiency in foreign exchange from staple food trade by 1990 and an improvement in aggregate economic surplus, although the expected decade improvement in food-energy consumption per capita would fall from 10% to 8%.     

The linkage effects of raw material processing in economic development: A survey of modeling and other approaches

Processing of primary raw materials has become an important and widely recommended strategy for economic development. Yet, even as the councils of many LDCs call for primary commodity producers to gain greater participation in downstream activities, there remain doubts on fundamental questions:What comparative advantage and what disadvantages do processing activities have in the LDCs?What linkages do processing activities offer?What is the potential contribution of processing to economic goal attainment in the LDCs?In this article we survey the material on processing, particularly with respect to modeling direct and indirect linkages between processing and the LDC economies. The article examines the following topics: (1) the literature on processing in economic development; (2) modeling processing linkages; and (3) outstanding questions regarding processing linkages.We focus on quantifiable linkages between the processing industry and the rest of the economy. There is also the possibility of other linkages, such as the development of entrepreneurship and management talent and technology, that are more difficult to quantify. It is important to distinguish between micro linkages, which refer to the direct impact on supplier and user sectors, and macro linkages, which include indirect general economic effects transmitted through government revenue and expenditures, the money supply, and foreign exchange availabilities.     

Consistent price determination of income and production: A singular equation system applied to the MPS model

In this article we present a general methodology that can be used to estimate a singular equation system of relative prices for a large disaggregated macroeconometric model (MPS). The accounts consistency requirements and the necessity to utilize distributed lag restrictions and to impose a serial correlation structure on the estimated model make these sum constraints rather cumbersome. Estimates of the MPS model and multiplier analysis illustrate the use of these constraints on a large forecasting model as well as the feasibility of the technique.     

A computable prototype model of economic development

Economic development models need to advance beyond the two-gap type capital-output models of growth. This paper presents a prototype model of economic development where development is defined more broadly than aggregative output growth in terms of four objectives, namely, income, consumption, distribution, and employment. It is in keeping with the basic needs approach recently developed by the World Bank and other international organizations.The model formulation is based on the dualistic theory of capital formation and structural change. The specification is on the supply side. A novel aspect of the model is that it incorporates the role of education, health, and nutrition in economic development. Further it makes use of cross section data, which is unusual in model building.The model is put to illustrative use to generate dynamic policy multipliers of education and health expenditure. The results do not support the Malthusian fears that increased health expenditure would cause massive unemployment and reduce the standard of living in LDCs.     

A model of the Canadian global exchange rate: A test of the 1970s

A review of the literature indicates that no single exchange rate model has been able to track successfully the movements of the Canadian dollar for both the 1970–1976 period and the period thereafter. The purchasing power parity model, irrespective of whether based on relative wholesale prices, unit labor costs, GNP deflators, or export prices performs very poorly; the monetarist models collapse because of their strict adherence to the purchasing power parity and interest rate parity assumptions; the portfolio demand models require a significant adjustment for the post-1976 period. This paper presents a medium-term eclectic model of the global exchange rate of the Canadian dollar and examines a spectrum of broad issues that reflect on the efficiency of the foreign exchange market of Canada. These issues are basically related to the interest parity assumption, the role of speculation, and the test of rational expectations. The global exchange rate is defined as the value of the Canadian dollar measured in terms of a unit of basket of currencies comprising currencies of France, West Germany, Japan, the U.K., and the USA. The model belongs to the same genre of balance of payments structural models that explain the exchange rates by balancing demand and supply of foreign currencies. The model simultaneously explains both spot and forward rates, and it has been estimated and tested by using the quarterly data for 1971–1981.     

Restructuring for import competition from developing countries,I: Labor displacement and economic redeployment in the United States

The widely-held belief that imports into America have been responsible for job losses in labor intensive industries is examined. It is shown that economic growth impacts on these industries, and that productivity growth and chaning demand patterns, have been quantitatively larger than changes in trade levels affecting employment in individual industries. It is concluded that protection can do very little to affect employment trends in affected industries.     

A simulation model of infant feeding and family economics in developing countries

Malnutrition is one of the major problems in the Third World. Rooted in mass poverty. It has implications that seriously hamper the ability of poor countries to reach higher standards of living Malnutrition affects the biological development of human beings, which limits intellectual growth and therefore hampers social and economic betterment. At the same time the cultural fabric in many countries has been badly torn, with an increasingly large share of population moving into grossly underemployed and gravely underpriviledged communities within urban areas. This change has altered most traditional life styles: one of its major consequences has been the marked decline in the breast-feeding of infants. The nutrition and welfare of the family affected by new infant feeding practices, not only interact with the household economy, but affect and are affected by social forces and external conditions.This paper presents a model to address these issues and measure the extent by which the above mentioned interaction threatens economic growth and standards of living encouraging a vicious circle of worsening quality of life and declining economic potential. The model is applied to the economy of Malaysia on the basis of statistical information generated by random sampling techniques. The model is designed to provide a simulation mechanism which although bared on expectations and known input conditions takes into consideration random determination events within predetermined probable patterns. The basis of the procedure is a profile of areas occuring within a single family over a span of 10 years.     

Models of economic planning under uncertainty: A selective survey and appraisal

Uncertainty and risk have played significant roles in policy making, at the micro and macro levels, from formulation of policy models to their actual implementation in several countries. The impact of risk aversion on policy making has differedm however, both in magnitude and intensity. Thus, for less developed countries with large commodity exports, stabilization policies have played a role as important as those for income growth and employment; for centrally planned economies, the investment cycles leading to large-scale divergences of actual from planned targets in strategic sectors have led policy makers to consider the need for building adequate safety margins in the planning process. Finally, for developed economies, the applied theory of indicative planning and decentralization has stressed the various informational gaps and competing risks that may impede an efficient and cooperative solution between private and public sectors. A selective survey and appraisal of the planning methods as they relate to risk and uncertainty is attempted here for less developed, centrally planned, and developed market economies.     

A disaggregated model of world production and trade: An estimate of the impact of the Tokyo Round

We present in this paper a computational model of world production, trade, and employment that is disaggregated by country and sector and report on the application of the model to the changes in tariffs and quantifiable nontariff barriers negotiated in the Tokyo Round that was concluded in 1979. The model incorporates supply and demand functions and market-clearing conditions for 22 tradable industries, plus markets for 7 nontradable industries, in each of the 18 major industrialized countries and 16 major developing countries. The equations of the model are presented in the text and the explicit functional forms in an appendix. The implementation of the model is discussed briefly.Application of the model to the Tokyo Round suggested that there will be small but beneficial effects on trade, domestic prices, and economic welfare in practically all the major industrialized countries and in some of the major developing countries. Because many of the NTB codes negotiated in the Tokyo Round were stated in advisory terms, their impact cannot be evaluated unambiguously at present. Further, many existing NTBs of importance were exempted altogether from the negotiations. The Tokyò Round must be viewed accordingly as having dealt with a somewhat limited part of all interferences with trade.     

Commodity market stabilization: A comparison of simple and optimal intervention strategies in the world copper market

With the publication of the Brandt Report, international commodity policy has again become an important issue. Commodity stabilization agreements have been proposed as a means of stabilizing producers' incomes and/or redistributing wealth to less developed economies. This paper examines, in the context of a single market, the extent to which prices can be stabilized, the potential costs of such a scheme, and whether this redistribution would be achieved. By comparing the bandwidth rules that have been proposed with optimal stabilization rules, we find that significant stabilization is possible but expensive and that bandwidth rules are likely to prove inadequate because they cannot anticipate.     

A model of the Canadian global exchange rate: A test of the 1970s

This comment points out some methodological weaknesses in the Canadian global exchange rate model and the associated efficiency tests of Marwah and Bodkin. The model is found to be inadequate for policy analysis.     

Must high commodity prices depress the world economy? An application of a world model system

The impact of higher primary commodity prices on the world economy is central to the North-South dialogue. The less developed countries are seeking a way to obtain a larger share of world income. In the context of current discussions of commodity price stabilization, UNCTAD's “integrated programme” for example, this is likely to mean higher commodity prices. A critical question is then, “Must higher prices for primary commodities depress the industrial economies?”The cyclical swing of 1973–1975 would seem to support the thesis that high primary commodity prices lead to recession in the industrial countries. Yet this experience is not conclusive evidence. Many complex forces, some natural and others policy induced, accounted for the recession. The impact of primary commodity prices must be considered in a full system, recognizing not only the direct costs, but also the resulting demand feedback. Under different circumstances, higher payments to the commodity producing LDCs may well increase demand for manufactures and stimulate exports and industrial activity in the developed countries.This paper uses a version of the LINK world model system to examine the linkages between commodity prices and world economic activity. In the first part we examine the demand feedback in a simple theoretical model of the interrelationships between commodity consumer countries and the commodity producers. In the second part we use an empirical system, COMLINK, the version of the LINK system that incorporates commodity models and commodity price linkages, to simulate various types of commodity price impacts.     

A model of the inflationary process in six major O.E.C.D. economies: Empirical results and policy implications

In contrast to most recent empirical work on inflation which has concentrated on the size and stability of coefficients in the wage equation, this paper provides a reexamination of the price equation. Evidence is presented on the structural determinants of inflation in six large industrial nations. It is demonstrated that price equations which include capital costs and excess demand among the regressors perform exceedingly well according to the usual statistical criteria. The results of this study indicate that the inflationary process possesses a high degree of uniformity among the larger industrial countries. This pertains not only with respect to the specific independent variables in price equations, but also with respect to the high degree of uniformity of the estimated coefficients. Additionally, the findings indicate that lower productivity growth and higher capital costs have contributed significantly to the inflationary process since 1974. Furthermore, since higher capital costs are one consequence of tighter monetary policies, the adoption of such policies in response to the two oil price shocks of the 1970s may have offset their intended deflationary effects on prices through the linkage of wage costs and aggregate demand.     

Dollar appreciation,deficit stimulation,and the new protectionism

This article probes whether contemporary U.S. protectionism arises from an appreciating dollar. It concludes that (a) an enrich-thy-neighbor policy of upvaluation has transformed the current U.S. economic recovery into an engine of global recovery; (b) flexible exchange rates continually equilibrate the balance of payments as evidenced in changed domestic—relative to foreign—prices, as well as in capital movements induced by interest-rate differentials resulting from exchange-rate shifts; and (c) flexible exchange rates automatically alter so as to maintain a country's competitive position in the world economy even when facing deficits at home and abroad.     

The Law of the Sea treaty and the regulation of nodule exploitation

The production of nonferrous metals from manganese nodules from the ocean floor has potential impact on prices of cobalt, copper, nickel, and manganese and on the earnings of land-based producers. These effects must be considered in the Law of the Sea negotiations. This article uses econometric models to evaluate the impact of nodule production on the LDC producers. We find that the price impact is greater for cobalt whose nodule production is very large relative to conventional output, but that the impact on LDC earnings is greater for copper and nickel.     

Economic evaluation of an agricultural sector investment program: A case study for Peru

An evaluation of a sector-wide investment program differs in important respects from an evaluation of an individual project. First, the program as a whole is likely to have more than a marginal effect on production and trade levels and other variables, and so the returns to any one project depend on which other projects are included in the program. Therefore the evaluation of all projects in the program must be carried out jointly. Second in many cases Policy makers may judge alternative program designs according to a multiplicity of criteria, explicitly or implicity. Hence the project identification stage of work is more useful if it takes into account the multiple criteria. This paper reports an experience in constructing and applying a model for the design and evaluation of a sector-wide agricultural investment program. Emphasis is placed on the ways in which such a model may be used. In the course of the applications discussed here, policy makers' preference weights among alternative goals were elicited, but even without such information a model-based exercise can be helpful in the design of a sector investment program.     

A computational general equilibrium approach to the shadow pricing of trade restrictions and the adjustment of the exchange rate, with an application to Argentina

A general equilibrium model of an open economy in which there are ad valorem texes on domestic production and export activities, and import activities are subject to both tariffs and quotas is constructed. A domestic monetary asset, foreign exchange, and a corresponding nominal exchange rate are introduced and a numerical example of the model is constructed. The example is solved via the Scarf fixed point algorithm, first with taut quotas and then after having relaxed quotas. Various price indices are then used to guide programs designed to stabilize the trade balance against the quota liberalization. An empirical example, using Argentine data, is carried out to find the quota equivalent of a particular tariff.