Working Papers

February 1, 1994

Systemic Requirements for Monetary Stability in Eastern Europe and the Former Soviet Union

Description: The primary function of banks during economic transformation is seen to be provision of an efficient payments mechanism. The lack of banking skills, particularly in credit allocation, is seen as the major problem in stable monetary systems. This is a problem which can be expected to last many years. The solution is to limit banks to very safe assets (initially central bank liabilities). Combining such safe banks with a monetary rule would provide stable monetary systems during transition.

February 1, 1994

Economics, Politics, and Ethics of Primary Commodity Development: How Can Poor Countries in Africa Benefit the Most?

Description: The critical role of agricultural commodities in the growth of low-income countries is examined. A combination of factors has resulted in declining agricultural prices, necessitating further increasing volumes by developing countries to maintain export earnings. But low growth in factor productivity in Africa compared to competitors caused declining export shares in African countries. A broad-based smallholder strategy based on producing commodities in which a country enjoys comparative advantage needs to be supported by productivity enhancing innovations in food and export commodities, a stable price environment, availability of infrastructure and access to credit. Such an environment requires partnership between government and private agents.

February 1, 1994

Exchange Market Pressures and Speculative Capital Flows in Selected European Countries

Description: This paper estimates a speculative attack model of currency crises in an attempt to identify the roles of macroeconomic fundamentals and speculative market pressures in the recent crisis, as well as earlier devaluations in adjustable fixed exchange rate systems in the European currency markets. For a sample of five countries, including Denmark, Ireland, Spain, Norway, and Sweden, our empirical analyses show that both economic fundamentals and speculative factors have a significant influence on the probability of devaluations. The recent experience in the European foreign exchange markets suggests that the latest realignments are mainly the result of foreign exchange market tensions amidst the growing conflict between the needs of the domestic economies and the policies needed to maintain fixed exchange rates. Our results confirm that regardless of the source of the deterioration in economic conditions, market participants perceived the existing parities of the currencies in these five countries as inconsistent with their underlying economic fundamentals, thus effectively bringing about either a realignment or a modification of the exchange arrangement.

February 1, 1994

Real Exchange Rates and the Prices of Nontradable Goods

Description: This paper attempts to provide a perspective on real exchange rate developments following the inception of the EMS. The focus is on structural determinants of real exchange rates, notably the behavior of tradables and nontradable prices and productivity. It is found that changes in the relative price of tradable goods in terms of nontradables account for a sizable fraction of real exchange rate dynamics during the EMS period. Sectoral productivity growth differential help explain the behavior of the relative price of tradable goods, especially in the long run. There is also some evidence that the EMS has extended on relative price behavior.

February 1, 1994

Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies

Description: This paper explores a number of methodological issues that arise in the calculation of equilibrium exchange rates, which are identified in this paper as those real effective exchange rates consistent with macroeconomic equilibrium, i.e., internal and external balance. A partial equilibrium, comparative static analysis is presented and the methodology is applied to the break-up of the Bretton Woods exchange rate system. Then the dynamic interaction between the current account and the stock of net foreign assets is examined. Finally, the analysis uses a more general equilibrium approach by relying on simulations using MULTIMOD, a multicountry econometric model. The paper demonstrates the extent to which the equilibrium exchange rate calculations depend upon alternative assumptions regarding factors that affect internal and external balance. In addition, results obtained using the comparative static and dynamic macroeconomic approaches are compared.

February 1, 1994

Geography, Trade Patterns, and Economic Policy

Description: This paper presents a geographical theory of location and interregional trade. Location is treated as an endogenous variable by firms, consumers and perfectly mobile workers in a two-sector economy. Space plays a central role owing to transportation costs, market access, and distance from polluting industrial centers. The model is used to examine: (1) aspects of a compensating-differential theory of regional unevenness, (2) the theoretical formulation of a gravity theory of trade patterns, (3) the geographic basis for industrial and environmental policy, and (4) the interaction between reductions in transportation costs, location patterns, and technological improvements.

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January 1, 1994

The Payments Systems Reforms and Monetary Policy in Emerging Market Economies in Central and Eastern Europe

Description: The paper discusses the interrelationships between payments system reform and monetary policy implementation in selected countries in Central and Eastern Europe. The reforms in the payments system are viewed as closely interrelated with the development of money and foreign exchange markets and the instruments of monetary policy used by the central banks. Large and variable float balances created special challenges. The paper shows that while departing from very similar origins, there were significant variations in experiences of the countries studied in transforming their payments systems after the start of the reforms towards a market economy, from which certain lessons can be drawn.

Notes: Also published in Staff Papers, Vol. 41, No. 3, September 1994.