Working Papers
1995
August 1, 1995
Are Exchange Rates Excessively Volatile? and What Does "Excessively Volatile" Mean, Anyway?
Description: Using data for the major currencies from 1973 to 1994, we apply recent tests of asset price volatility to re-examine whether exchange rates have been excessively volatile with respect to the predictions of the monetary model of the exchange rate and of standard extensions that allow for sticky prices, sluggish money adjustment, and time-varying risk premia. Consistent with previous evidence from regression-based tests, most of the models that we examine are rejected by our volatility-based tests. In general, however, we find that exchange rates have not been excessively volatile relative to movements of their determinants, with respect to the predictions of even the most restrictive version of the monetary model. Alternative measures of “volatility”, however, may disguise the cause of rejection as excessive exchange rate volatility. This a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper of the International Monetary Fund, mentioning the author(s), and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
Notes: Also published in Staff Papers, Vol. 43, No. 1, March 1996.
August 1, 1995
The Costs of Taxation and the Marginal Cost of Funds
Description: It is argued that taxation causes three kinds of deadweight losses and two types of direct costs. The deadweight losses arise from substitution, evasion, and avoidance activities while the direct costs are administrative and compliance costs. Some of these social costs tend to be discontinuous and/or nonconvex. Because most models of taxation ignore some components of the social costs of taxation, their conclusions cannot be of a general nature. An alternative approach to policy evaluation is to rely on a marginal efficiency cost of funds rule which can indicate appropriate directions of reforms. The paper discusses its merits, applicability, and limitations, as well as its relationship to other concepts.
Notes: Also published in Staff Papers, Vol. 43, No. 1, March 1996.
August 1, 1995
Price Measurement and Mismeasurement in Central Asia
Description: The vertiginous increases in the overall price level and dramatic swings in relative prices experienced by Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan since the onset of the transition rendered their traditional Paasche retail price indices obsolete and called for the introduction of Laspeyres consumer price indices. While the latter represent a major improvement, several measurement or interpretation issues remain, reflecting various potential index number biases, dispersion of prices and inflation across geographical areas and social groups, discontinuities in the inflation process, residual shortages, and seasonality.
Notes: Prepared for a conference on "Poverty and Social Security in Central Asia" organized by the European University Institute, in Florence, on September 22-23, 1995, and to be published in Household Welfare in Central Asia.
August 1, 1995
The Fundamental Determinants of the Real Exchange Rate of the U. S. Dollar Relative to Other G-7 Currencies
Description: The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Notes: Examines the explanatory power of the NATREX model to explain the evolution of the real exchange rate of the U.S. dollar during the floating exchange rate period.
August 1, 1995
Working Paper Summaries (WP/95/1 - WP/95/61)
Description: This compilation of summaries of Working Papers released during January-June 1995 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period. Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201.
Notes: Compilation of summaries of Working Papers released during January-June 1995.
August 1, 1995
Exchange Market Reform, Inflation, and Fiscal Deficits
Description: This paper examines the short- and long-run effects of exchange market reform in developing countries. The first part reviews the recent experience of Guyana, India, Jamaica, Kenya, Sierra Leone, and Sri Lanka with exchange market reform. The second part studies analytically the short-run dynamics of the parallel market premium and the money supply upon unification, when the post-reform regime consists of either a pure float or a managed float. The third part discusses the impact of unification on inflation and quasi-fiscal deficits, and identifies a variety of implicit taxes and subsidies that must be taken into account in assessing the longer-run effects of exchange market reform.
August 1, 1995
Asymmetry in the U.S. Output-Inflation Nexus: Issues and Evidence
Description: This paper presents empirical evidence supporting the proposition that there is a significant asymmetry in the U.S. output-inflation process, which implies that excess demand conditions are much more inflationary than excess supply conditions are disinflationary. The important policy implication of this asymmetry is that it can be very costly if the economy overheats because this will necessitate a severe tightening in monetary conditions in order to reestablish inflation control. The small model of the U.S. outputinflation process developed in the paper shows that the seeds of large recessions, such as that in 1981-82, are planted by allowing the economy to overheat. This type of asymmetry implies that the measure of excess demand which is appropriate in estimating the Phillips curve cannot have a zero mean; instead, this mean must be negative if inflation is to be stationary. The paper also shows that a failure to account for this important implication of asymmetry can explain why some other researchers may have been misled into falsely accepting the linear model. The empirical results presented in the paper show that the conclusions regarding asymmetry are robust to a number of tests for sensitivity to changes in the method used to estimate potential output and in the specification of the Phillips curve.
Notes: Also published in Staff Papers, Vol. 43, No. 1, March 1996.
August 1, 1995
Capacity Constraints, Inflation and the Transmission Mechanism: Forward-Looking Versus Myopic Policy Rules
Description: This paper develops a small model of the output-inflation process in the United States in order to examine the implications of alternative monetary policy rules. In particular, two types of policy rules are considered; a myopic rule where interest rates respond contemporaneously to output and inflation and a forward-looking policy rule that exploits information about the nature of transmission mechanism in the setting of interest rates. The model has two key features. First, there are significant lags between interest rates and aggregate demand conditions. Second, the model is based on an asymmetric model of inflation where positive deviations of aggregate demand from potential are more inflationary than negative deviations are disinflationary. As a consequence of this asymmetry, a policymaker that follows a myopic policy rule and allows the economy to overheat periodically will be forced to impose large recessions on the economy to keep inflation under control. The paper shows that the estimated degree of asymmetry implies that myopic policies can result in significant permanent losses in output. By contrast, policymakers that follow a forward-looking policy rule that avoids overheating will not only reduce the variance of output but also raise the mean level of output.
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