Working Papers

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1991

June 1, 1991

Portfolio Preference Uncertainty and Gains From Policy Coordination

Description: International macroeconomic policy coordination is generally considered to be made less likely—and less profitable—by the presence of uncertainty about how the economy works. The present paper provides a counter-example, in which increased uncertainty about portfolio preference of investors makes coordination of monetary policy more beneficial. In particular, in the absence of coordination monetary authorities may respond to financial market uncertainty by not fully accommodating demands for increased liquidity, for fear of bringing about exchange rate depreciation. Coordinated monetary expansion would minimize this danger. A theoretical model incorporating an equity market is developed, and the stock market crash of October 1987 is discussed in the light of its implications for monetary policy coordination.

Notes: Also published in Staff Papers, Vol. 39, No. 1, March 1992.

June 1, 1991

Real and Nominal Exchange Rates in the Long Run

Description: This paper decomposes longer-run movements in (major) dollar real exchange rates into components associated with changes in nominal exchange rates and price levels, and their comovements. Though the decompositions suggest some permanent movements, they imply that there are large transitory components in real exchange rates. These transitory components in real exchange rates are found to be closely associated with those in nominal exchange rates. A stochastic version of Dornbusch’s overshooting model—configured with representative parameter values for the United States and subjected to permanent nominal shocks—can rationalize these transitory comovements of nominal and real exchange rates as well as several other features of the decompositions.

June 1, 1991

Exchange Rate Economics: A Survey

Description: We survey the literature on the two main views of exchange rate determination that have evolved since the early 1970s: the monetary approach to the exchange rate (in flex-price, sticky-price and real interest differential formulations) and the portfolio balance approach. We then go on to discuss the extant empirical evidence on these models and conclude by discussing how the future research strategy in the area of exchange rate determination is likely to develop. We also discuss the literature on foreign exchange market efficiency, on exchange rates and ‘news’ and on international parity conditions.

Notes: Also published in Staff Papers, Vol. 39, No. 1, March 1992.

June 1, 1991

Oil, National Wealth, and Current and Future Consumption Possibilities

Description: This paper offers a discussion about the macroeconomics of exhaustible resources. In a resource-based economy, long-term sustainability is an obvious issue. This paper outlines some ideas on how to treat issues related to exhaustible resources in a macroeconomic context. Based on a small dynamic general equilibrium model, the approach is demonstrated with the help of some simple numerical examples.

Notes: Taking Norway as a point of departure, this paper discusses the macroeconomics of exhaustible resources.

June 1, 1991

General Equilibrium Under Shortage: A Generalized Barro-Grossman Model

Description: In several recent articles, the Barro-Grossman model of general equilibrium under shortage has been modified to incorporate money demand and alternative retail sales mechanisms. This paper extends this work to allow for spillovers in deficit goods markets (modeled as feedback of black market prices on the real value of nominal money balances). Comparative statics analysis confirms the conventional view, recently challenged in the literature, that government expenditure in a shortage economy tends to reduce output. The conventional view associating shortage with higher savings is, however, substantially qualified. The model appears to be more consistent than previous models with the available empirical evidence, and offers insights into the consequences of price and monetary reform in shortage economies.

Notes: Investigates a model of general equilibrium in a "shortage economy" -- that is, an economy with significant excess demands at the officially controlled prices.

June 1, 1991

Central Bank Independence: Issues and Experience

Description: There has been growing interest recently in the scope for promoting monetary stability through the establishment of independent central banks. This paper reviews the issues involved in central bank independence against the background of arrangements in nine countries. The analysis suggests that detailed institutional arrangements would need to be carefully designed if the potential benefits of central bank independence are to be delivered. Particularly important are the nature of arrangements to resolve various types of conflicts involving monetary policy, and arrangements to promote accountability and public monitoring of monetary policy performance.

June 1, 1991

Money Demand in the Netherlands

Description: This paper analyzes the demand for narrow money balances in the Netherlands. Demand for narrow money balances had increased markedly in relation to GNP in the Netherlands throughout the 1980s. This phenomenon could not be explained satisfactorily with traditional Goldfeld-type money demand functions which had performed well until that time. Drawing on advances in dynamic modeling from the error corrections and cointegration literature, and incorporating yield-curve effects and the exchange rate of the guilder with the U.S. dollar as additional monetary indicators significantly improves the performance of money demand estimates.

June 1, 1991

Input Shortages in Mixed Economies: An Application to Indian Manufacturing Industries

Description: Widespread shortages in key inputs are common in mixed economies of developing countries. These shortages appear to occur at the same time that relatively high rates of capacity underutilization in manufacturing industries are observed. This paper develops a simple model which explains the existence of excess capacity when there are quantitative restrictions on key inputs. This model is tested using data for manufacturing industries in India, and the results indicate that shortages in domestic rather than imported inputs imposed binding constraints on capacity utilization rates.

June 1, 1991

Forced Savings and Repressed Inflation in the Soviet Union: Some Empirical Results

Description: In countries such as the Soviet Union, where wealth is mainly stored in monetary assets, the behavior of the money to income ratio is a poor indicator of the growth of undesired monetary balances (monetary overhang). In those countries a monetary overhang is primarily a wealth overhang, which has to be analyzed by evaluating deviations of actual from desired wealth holdings; this requires an empirical analysis of consumption and saving decisions. In this paper, we present estimates of a consumption function for the Soviet Union, from which an evaluation of the monetary overhang existing at the end of 1990 is derived.

Notes: Also published in Staff Papers, Vol. 39, No. 2, June 1992.

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