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We estimate the effect of sovereign credit rating events on the foreign exchange market. Using entropy balancing—a treatment effect methodology that properly addresses the possible self‐selection and endogeneity biases related to rating events—we find robust evidence that a positive (negative) sovereign credit rating event significantly increases (decreases) on average exchange rates, with a larger magnitude for negative events. This effect remains significant under flexible (but not under fixed) exchange rate regimes, and displays asymmetries related to the size of the rating event: in particular, only negative large (i.e., above one notch) rating events trigger a significant response of exchange rates. Lastly, we unveil important nonlinearities related to the initial value of the rating, suggesting a possible amplification mechanism: the impact of positive (negative) rating events is stronger in absolute value if ratings are initially high (low). [ABSTRACT FROM AUTHOR]

This paper looks at the role of external trade and foreign equity finance in determining the impact of exchange rate uncertainty on firm‐level employment growth in a major developing economy: India. Exchange rate uncertainty is found to affect firm‐level employment growth adversely on average, but the impact depends upon firm‐level characteristics such as exposure to foreign trade through imports and exports and firm‐level mark‐up. Foreign equity finance reduces the negative impact of exchange rate uncertainty on employment growth but the same cannot be said about access to domestic equity finance. [ABSTRACT FROM AUTHOR]

In this article, we study how the export behaviors of new and incumbent exporters differentially respond to exchange rate shocks. We establish a dynamic model, in which new exporters strategically charge a lower price than incumbent exporters to grow their customer base and increase future sales. The model predicts that new exporters adjust their prices more aggressively relative to their incumbent counterparts in response to exchange rate fluctuations. Using a transaction‐level data set containing all Chinese exporters during the 2000–2009 period, we find supporting evidence for the model's predictions: new exporters adjust their price 1.5 times more than incumbent exporters. This, in turn, results in export quantities being less responsive to exchange rate shocks among new exporters. The result holds for a series of robustness checks. The findings imply that there are different degrees of exchange rate pass‐through among new and incumbent exporters. [ABSTRACT FROM AUTHOR]

Early in his career, Hayek viewed attempts to stabilize exchange rates by facilitating cooperation between central banks, with respect to their demand for gold, to be at odds with the fundamental mechanisms of the gold standard. He opposed proposals by Irving Fisher, Gustav Cassel, and Ralph Hawtrey that promoted stabilization of demand for gold and price levels as a next best option. Hayek viewed the nations that refused to devalue their currency after monetary expansion during wartime as complicit in degrading the international gold standard. In 1935 Hayek's emphasis began to change, his position sounding much like the arguments of Cassel and Hawtrey. Though he eventually gave up hope that the international gold standard would be reestablished, his later work on money provides theoretical underpinnings for systems that would promote the same sort of stability and predictability that the classical gold standard had provided. [ABSTRACT FROM AUTHOR]

Immigrant remittances have a broad effect on the receiving economies. We show this impact on the main macroeconomic aggregates is dependent on the policy arrangements in place that manage capital flows. We look at remittance inflows in a small open economy to examine their influence on output under alternative exchange rate regimes. Using a simple stochastic limited participation model, we are able to reproduce dynamics consistent with the empirical literature. We find that the dynamics of labor, inflation, and output are dependent on the parameterization of the utility function and on the monetary rule governing the evolution of the interest rate and in particular with respect to the response of interest rates to exchange rate movements. We find that the initial drop of output resulting from a remittances shock is similar under alternative exchange rate regimes, but the subsequent recovery of output is faster and stronger under more flexible exchange rate regimes. We provide suggestive empirical evidence from a panel Vector Autoregression specification for 17 Latin American countries that corroborates our results. [ABSTRACT FROM AUTHOR]

Exchange rate commitments implied in the silver standard originally anchored China's monetary policy and the inflation rate in the early republican period. It was believed that China's free silver standard acted as a natural check on the excessive issuing of notes by warlords and local governments. This consensus view, however, overlooks the fact that the silver standard was inherently unstable because it left no room for monetary policy to stabilize output and inflation. This article employs a formal structural model to show that a fiat currency unlinked to fluctuations in the price of silver that allows government to implement self-adjusting monetary policies would further stabilize China's output and inflation. [ABSTRACT FROM AUTHOR]

This article investigates the effects of real exchange rale uncertainty on manufactures exports from 28 emerging economies, representing 82% of all developing country manufactures exports, and explores the sources of heterogeneity in the uncertainty effects by controlling for the direction of trade (south-north or south-south), and the level of financial development of the exporting country. The empirical results show that for more than half of the countries, the uncertainty effect is unidirectional, either south-south or south-north, and the median impact is negative. In addition, while we find that financial development augments trade, exchange rate shocks can negate this effect. Last but not least, trade among developing economies improves export growth under exchange rate shocks. [ABSTRACT FROM AUTHOR]

This study empirically compares, for the first time, the popular exchange-rate-targeting regime with the recently emerged inflation-targeting framework in developing countries. Applying a variety of propensity score matching methods and dynamic panel generalized method of moments (GMM) regressions to a sample of 50 developing countries for the years 1990-2006, we find strong and robust evidence that, compared to exchange-rate targeting, inflation targeting leads to a significantly lower inflation rate, and the lower inflation rate does not come at a cost of slower growth. [ABSTRACT FROM AUTHOR]

This article describes a general equilibrium market experiment that allows students to generate goods prices, exchange rates, and trade flows by trading with each other. Instructors can set experiment parameters, and output data are automatically generated as a spreadsheet file. Exchange rate and current account dynamics are the outcome of student production and trading decisions. The source code is available without restrictions on modification or use. [ABSTRACT FROM AUTHOR]

This article investigates empirically the effect of real exchange rate volatility on sectoral bilateral trade flows between the United States and its top 13 trading partners. Our investigation also considers those effects on trade flows that may arise through changes in income volatility and the interaction between income and exchange rate volatilities. We provide evidence that (i) exchange rate volatility does not systematically affect sectoral trade flows, (ii) income volatility has little impact on trade flows, and (iii) the effect of the interaction term on trade flows is opposite that of exchange rate volatility, dampening its impact on trade flows. [ABSTRACT FROM AUTHOR]

We use sign restrictions to identify monetary policy for a small open economy with heavily managed exchange rates. We apply the proposed sign restrictions to the Taiwanese case, where existing studies tend to find no clear effect of monetary policy shocks on the output and price level. Our principal findings are that a contractionary monetary policy shock causes a permanent and significant decline in real gross domestic product, broad money, and price level. Our identification scheme is able to avoid the puzzling impulse responses from which other identification schemes more or less suffer. The fact that monetary policy has not been correctly identified may have led existing studies to conclude that monetary policy is ineffective. [ABSTRACT FROM AUTHOR]

In this paper, we use the Blanchard-type uncertain lifetime overlapping generations framework to develop a three-good open economy to examine the effects of demand changes on the economic performance of small open economies with sectoral adjustment costs. Our simulation results reveal a discernible Harberger-Laursen-Metzler effect on both temporary and permanent terms-of-trade shocks. The inclusion of sectoral adjustment costs generates persistent deviations of the real exchange rate from its long-run equilibrium in response to terms-of-trade shocks, with the degree of sectoral adjustment costs having an effect on the subsequent dynamic transition of the economy. We also find that an increase in the mortality rate leads to a lowering of the current account. [ABSTRACT FROM AUTHOR]

Excessive fluctuations in exchange rates often influence trade flows. Theoretically, increased uncertainty may increase or decrease the volume of trade, or leave it unchanged. Using annual export and import data for 102 industries from 1962 to 2004, we analyze both the short- and long-term effects of volatility in the peso/dollar real exchange rate on Mexican trade with the United States. We also investigate the effects of the North American Free Trade Agreement (NAFTA) on this relationship. We find that increased volatility has short-term effects on the trade flows of most industries but that the long-term effects are significant (positive or negative) for only one-third of industries. Most of the significant effects are negative rather than positive. [ABSTRACT FROM AUTHOR]

Using industry level data for Japanese foreign direct investment (FDI) flows to five Asian countries, we investigate how the sensitivity of FDI to the exchange rate changes across different industry types and exchange rate indices. Key results are as follows: (i) aggregated FDI data reported at the national level are insufficient for analysis, and industry-level data are required; (ii) pooling industries by export orientation reveals heterogeneity in the response of different types of FDI to the exchange rates; and (iii) alternative exchange rate measures, particularly the competitor-weighted exchange rate, perform better for export-oriented FDI. We use our results to address key conflicts in the literature on exchange rates and FDI. [ABSTRACT FROM AUTHOR]

In an effort to fight relatively high inflation, many developing countries try to manage their nominal exchange rates through official intervention. In addition, developing countries tend to have high transportation costs, tariffs, and nontariff barriers. These factors are among the sources of generating nonlinearity in real exchange rates and hence some nonlinear adjustment toward purchasing power parity (PPP) in developing countries. In this paper, we employ monthly real effective exchange rate (REER) data of 88 developing countries and test the null of nonstationarity versus an alternative of linear stationarity by the means of a conventional unit root test and compare the results with those obtained from a new test in which the null is the same but the alternative hypothesis is nonlinear stationarity. The latter test supports the PPP theory in more developing countries compared with the former test, suggesting that nonlinear adjustment toward PPP in developing countries is an important phenomenon. Reported country characterizations indicate that reversion in REER occurs more often for high-inflation countries and for countries with high flexibility in their exchange rates. [ABSTRACT FROM AUTHOR]

Exchange rate movements affect exports in two ways—rate depreciation and rate variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time-varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, and Taiwan and a zero net effect in Korea and Thailand. [ABSTRACT FROM AUTHOR]

Previous research that investigated the relation between U.S. trade flows and the value of the dollar either employed trade data between the United States and the rest of the world or between the United States and her major trading partners. In this paper we use monthly import and export data from 66 industries in the United States SITC Commodity Groupings over the January 1991-August 2002 period as well as cointegration analysis and show that in the long run real depreciation of the dollar stimulates export earnings of many U.S. industries, whereas it has no significant impact on most importing industries. [ABSTRACT FROM AUTHOR]

Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long-run purchasing power parity (PPP) does not hold for 16 real exchange rate series, which were analyzed in Diebold, Husted, and Rush (1991) for the period 1792-1913 under the Gold Standard. Rather, PPP deviations are mean-reverting to a changing equilibrium-a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a nonconstant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed. [ABSTRACT FROM AUTHOR]

Assesses prices charged for identical menu items sold at restaurant franchises in Texas and Mexico. Details on exchange rate performance and currency valuation; Use of purchasing power parity nominal benchmarks and trade-weighted indices; Difference of the international currency value of Mexican peso from the implied exchange rate.

Discusses the effects of model specification on foreign direct investment (FDI) models. Theoretical and empirical connection between FDI and exchange rates; Use of count data specification to model counts of FDI occurrence; Causes of the change in significant levels and the magnitude of the coefficients; Statistical testing on zero inflated Poisson model.

Focuses on the effect of exchange rate volatility on the volume of international trade. Impact of exchange rate volatility on export policy; Factors that influence gains in international trade; Analysis on sales flexibility in the exchange market.

Examines mean reversion in real exchange rates in high-inflation countries. Utility of a stochastic unit root model; Models of mean reversion; Demonstration of deviations from unity associated with high inflation episodes in Kalman filter estimates of stochastic unit roots.

Illustrates the role of policy in determining the observable relationships between exchange rates and prices. How underlying relationships can be solved; Examination of an experience of the United States; Proof of the hypothesis that the Federal Reserve acts to mitigate the effects of exchange rate fluctuations on domestic prices; Conclusion to study.

Presents information as it relates to the exchange-rate volatility measures on the volume of foreign trade. Examination on the theory and model specification; Details on alternative measures of exchange rate volatility; Results from a cointegration test.

Focuses on the method of long-run structural VAR structure in the analysis of the influence of real shocks on the fluctuations of real exchange rates for four Pacific Basin countries. Information on a structural VAR model; Details on the possible problems of interpreting these shocks as both nominal and real.

Discusses the results of a systematic analysis of the link between the deficits using a five-variable system for the flexible exchange rate period 1973 to 1991. Estimation of a vector error-correction (VEC) model; Tests for multivariate cointegration; Comparison of VEC with VAR results; Substitution of real interest rate for money growth; Alternative measures of budget and trade surpluses.

Examines the impact of exchange-rate uncertainty on the demand for real exports. Details about various export demand models; Effect of exchange-rate uncertainty on US real exports; Discussion on export demand behavior; Alternative measures of exchange-rate volatility; Conclusions of the study.

Presents an application of multiple cointegrating vectors and structural economic models to the exchange rate between the French franc and the American dollar. Determination of an illustrative model for studying exchange rates assuming money market equilibrium conditions; Investigation of stochastic properties of the model.

Examines the source of real exchange rate nonstationarity using a multivariate cointegration method. Impact of purchasing power parity (PPP) and the relative price of nontraded goods; Construction of traded and nontraded GDP price indices and productivity rates.

Discusses the response of real exchange rates to various economic shocks. Investigation of the sources of movements of the real exchange rates; Emphasis on stochastic trend movements of the real exchange rates; Examination of causes for fluctuations in the yen-dollar rate.

Analyzes the evolutional behavior of exchange rate and current account in response to an anticipated fiscal expansion under alternative wage indexation schemes. Review of related literature; Assumptions of the Sachs model.

Examines the real exchange rate effect of liberalizing capital movements through reduced capital taxes under the three alternative systems of taxing repatriated capital earnings for a small capital-importing and a small capital-exporting country. Related studies; Dendency of capital flow on the capital tax rate; Model of a small capital-importing and small capital-exporting country.

Examines the stability of pass-through of exchange rate changes to prices in aggregate Japanese exports in the light of correlation of movements in dollar exchange rates to declining pass-through observed in the American market. Theoretical considerations relevant to econometric specification used to illustrate pass-through; Application data; Estimation of aggregate and industry-level equations.

This paper demonstrates that this strategy is not novel. More specifically, under circumstances of a fiat monetary standard and a flexible exchange rate regime, classical (Bullionist) monetary writers such as Wheatley, Thornton, Ricardo and others all explicitly endorsed such a strategy. Since this approach has existed for more than one hundred and eighty years, it is most surprising that modern-day monetarists, who claim to be direct intellectual descendants of the above-cited classical monetary writers, remain critical opponents and detractors of such a strategy. Since outlines of the approach have been given elsewhere [11; 13], the strategy will not be presented here. After describing elements of classical monetary thought set forth prior to bullionist writers, the third section of the paper describes the bullionist policy prescriptions. Bullionists quite forcefully established all the key elements of a market price approach. In sum, by the end of the first decade of the nineteenth century, bullionist writers had recognized and established the following points relevant to an inconvertible currency regime: (1) Flexible market prices were useful indicators of changes in the value of money. (2) The price of bullion and the foreign exchange rate were particularly useful in this regard.[12] (3) These prices should be analyzed in conjunction with one another and assessed cautiously over lasting periods of time. (4) Under an inconvertible currency regime, it was the duty of the Bank of England to use these price indicators as guides to policy. (5) Real economic variables or interest rate levels were not reliable indicators or guides to policy. (6) Quantitative measures of monetary aggregates were not reliable indicators or guides to policy for a number of reasons. (7) Expansion of note issue or increases in the money supply were related to interest rate spreads. And expectations of inflation could have effects on interest rates. (8) The Bank of England could use... [ABSTRACT FROM AUTHOR]

The purpose of this study was to provide an empirical overview of the current account and related data. The study addressed the unit root and cointegrating properties of the current account and other variables to which it is believed to be fundamentally related for the period 1974:Q1-1988:Q2. The tests revealed that the current account, net national saving, net private saving, the budget deficit, nominal and real exchange rates, a measure of U.S. competitiveness, and a measure of relative demand pressure are unit root series. These conclusions were supported by results from a variety of different methodological approaches to testing for a unit root. In this paper, the more recent work on cointegration was also applied to investigate whether the current account shares a common trend with other economic variables to which it is believed to be related. It would be expected that the current account and net national saving would be co-integrated given the national income accounting identity. However, mixed results about a common long run trend between these two variables were found. Cointegration in a bivariate setting did not obtain with the other variables. Each of these findings is of particular interest since the budget deficit and the exchange rate are usually cited as explanations for the current account deficit. [ABSTRACT FROM AUTHOR]

Using co-integration tests, we found that there was little evidence supporting the stationarity of the real exchange rate for the Pacific Rim nations. These results are consistent with those for the Western nations and Japan; there exist shocks to the real exchange rate that are not self-correcting. Theory suggests that permanent real shocks can induce permanent changes in the real exchange rate. Money shocks, however, are generally deemed to be neutral in the long-run. Thus, theory suggests that monetary shocks of any variety may induce temporary, but not permanent, changes in the real exchange rate. Using vector-autoregressions, we found support for this claim. Interest rates and industrial production do not appear to cause movements in real exchange rates. For the U.S. and Korea, money shocks did Granger-cause the real exchange rate. In support of the standard claim, money shocks did not cause permanent changes in the real exchange rate. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to extend the existing literature by providing an answer to two related questions. First, what role, if any, has the federal budget deficit played for the trade deficit? Second, what has been its impact on the trade deficit relative to factors such as slow income growth abroad? The analysis employs a structural simultaneous equation framework. This approach has the advantage of allowing, in explicit form, for a number of alternative channels of transmission between the twin deficits. Rather than pre-judging the relative importance of any one of these transmission channels based on theoretical reasoning alone, the data are given a chance to identify their empirical relevance. In this paper we have analyzed the influence of both federal budget deficits and sluggish foreign income growth on the U.S. trade deficit of the early 1980s. In contrast to numerous previous studies that have relied on semi-reduced form models, the analysis has been conducted in a simultaneous equation framework. There are three main results. First, it appears that the persistence of the U.S. trade deficit of the 1980s cannot be fully explained by macroeconomic fundamentals alone, at least not as they relate to the federal budget deficit and sluggish foreign income growth. There seems to be a role also for microeconomic explanations of the trade deficit. Second, the budget deficit affects the trade deficit mainly through its impact on domestic absorption and income rather than through higher interest and exchange rates. Third, sluggish foreign income growth has contributed to the U.S. trade deficit of the eighties. But its share has most likely not been dominant. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to modify Ramirez's model in such a way that it reflects perfect capital mobility and the absence of sterilization, as he himself claims to have assumed, and to show how his conclusions are modified as a result. It is found that the proper coordination between fiscal and exchange rate policies suggested by Ramirez is no longer a possibility in the revised model. However, it is found that once the monetary policy is introduced, it is still possible to coordinate different policies to achieve macroeconomic targets.

Using both structural and reduced form estimates, we found U.S. imports from Japan insensitive to exchange rate movements, yet U.S. exports to Japan highly exchange rate elastic. We concluded that ". . . even a major depreciation of the dollar relative to the yen will not markedly reduce the present U.S. manufacturing trade deficit with Japan. Since over one-half of the 1984 U.S. manufacturing trade deficit was with Japan, this conclusion suggests that even a sustained dollar depreciation may not significantly reduce the U.S. multilateral trade deficit in manufacturing" [2, 931]. We are skeptical about the major point of the comment, which unlike our paper supports the conventional view that U.S. imports from Japan are exchange rate sensitive and that U.S. exports to Japan are not. Perhaps the inconsistency between the predictions in the comment on our paper and recent evidence forced the author to conclude that, in the event that his predictions proved wrong, "it would indicate further specification error, or a change of structure during the recent dollar depreciation" [1]. Another interpretation of the inconsistency, of course, is that our analysis was in fact correct. [ABSTRACT FROM AUTHOR]

In this paper, I argue that exactly the opposite has been true. I present evidence that, by using a "nominal" rather than a "real" specification, their equations are misspecified by omitting the lagged effects of price levels in the real exchange rate. When these effects are properly included, it is U.S. manufacturing imports from, rather than exports to Japan, which have been strongly responsive to the real exchange rate. Whether this is a stable relationship that will hold beyond the estimation period remains to be seen.[1]. [ABSTRACT FROM AUTHOR]

Replies to the comment of Daniel Himarios on the economic impact of foreign exchange rates in the U.S. Discussion on the role of currency substitution in domestic inflation; Details on the calculation of the rest-of-the-world money stock; Approximation of the lag between money and inflation.

This paper has taken another look at McKinnon's ICS hypothesis. I have demonstrated that Batten and Hafer's conclusions are based on results from a specification that does not seem to be supported by the data. For both the GNP deflator and the PPI there exist statistically superior specifications that overturn their conclusions. In extending the sample, I found that the data are indeed consistent with McKinnon's hypothesis. The exchange rate is an important factor in the determination of U.S. inflation and GNP growth. It is well-known, however, that the empirical regularities unveiled here are also consistent with alternative views of the world. It is still an open question as to which of these views deserves closer consideration. What is certain, however, is that one cannot ignore foreign influences, whatever the channel of transmission may happen to be. [ABSTRACT FROM AUTHOR]

We re-examine the empirical evidence on the Dollar/Pound exchange rate in the 1920s using the simple monetary exchange rate model popularized by Bilson [ 1; 2] and Frenket [8; 9]. Thus, it is not the purpose of this paper to suggest new empirical monetary exchange rate models. Nevertheless, there are several important reasons why we re-examine the simple monetary exchange rate model. First, several important implications of the monetary exchange rate model, in our opinion, are not adequately tested in existing work. Second, there is a presumption that the failure of the monetary exchange rate model in the 1970s and the 1980s is due to special events such as real shocks that affected PPP and the instability of the U.S. money demand function. By using the data from the 1920s, we hope to avoid the problem of the instability of the U.S. money demand equation in the 1970s. Moreover, Frenkel [10] found that PPP held up reasonably well in this period. Thus, the period of the 1920s provides a favorable setting to test the monetary approach. Finally, we choose the Dollar/Pound exchange rate based on data availability. This estimation method allows us to test several cross-equations restrictions implied by the monetary approach; but, to our knowledge, have not been adequately tested before in the literature. Thus, we believe our estimation method provides a more satisfactory and stringent test of the monetary approach than using ordinary least-squares, or the Theil-Goldberger mixed estimation procedure which was criticized by Hoffman and Schlagenhauf [16] as essentially constraining the parameter values to those suggested by the theory. We tested several restrictions implied by the simple monetary model of exchange rate determination which have seldom been directly tested before. Thus, we believe our testing procedure provides a more stringent test of the monetary model of exchange rate determination than using the ordinary least-squares or the Theil-Goldberger mixed... [ABSTRACT FROM AUTHOR]

This paper investigates the relationship between policy instruments and desired target levels in a small open economy when government and private spending are dependent on one another. First, the conceptual basis for the inclusion of government spending as an argument in the private consumption and investment functions is examined for both a fixed and flexible exchange rate regime. Next, it is shown that in the limiting case of perfect capital mobility, the signs and/or magnitudes of the multipliers of interest are no longer unambiguous. In view of this, we show that a gap arises between the perceived and actual models under which the monetary authorities operate. Thus, the paper outlines how the assignment problem is modified under conditions of uncertainty. It is shown that the presence of an additional policy instrument in the form of the composition of government spending may render the assignment problem more tractable in an open economy setting. [ABSTRACT FROM AUTHOR]

This paper studies short run movements in foreign exchange rates to the Commerce Department's monthly announcements of the U.S. balance of Merchandise Trade. It extends previous studies of foreign exchange response to economic news in three ways. First, by studying the response to the trade announcement, which occurs two months after the month to which the announcement refers, the paper provides a more precise measure of the response to the news content of trade-related announcements than earlier studies. This, for instance, is an improvement over Dornbusch's definition of current account news as the innovation in the actual OECD (Organization for Economic Co-operation and Development) biannual current account estimates. Second, the paper studies not only movements in spot rates to the announcement, but calculates the movements in forward premiums to this information. By studying the response in forward premiums to the merchandise trade announcements, the paper examines whether the information in the announcements implies effects that operate through capital flows and interest rates in addition to responses that operate through the flow of merchandise trade. [ABSTRACT FROM AUTHOR]

In his pioneering work of exchange rate dynamics, Dombusch [5] presents a fixed-income model and shows that the short-run exchange rate is bound to overshoot following a monetary expansion, completely independent of the trade-balance elasticity.[1] In the present note, we purport to show that the magnitude of the trade-balance elasticity plays a central role in determining whether the short-run exchange rate overshoots or undershoots in a fixed-income model of Dornbusch vintage, inasmuch as the dynamics of interest rate follows the loanable funds theory. [ABSTRACT FROM AUTHOR]

The above discussion has established the following two findings for a regime of dual floating exchange rates, following an expansionary monetary policy: Finding 1. The commercial exchange rate will not change in the short run. Over time it gradually rises to a level consistent with monetary neutrality. Finding 2. The financial exchange rate will depreciate in the short run. Whether this depreciation exceeds or falls short of the total adjustment in the long run, which also exhibits monetary neutrality, depends on the magnitudes of the elasticity of demand for money with respect to the interest rate. For the purpose of stabilizing the exchange rate for the current account transactions, finding 1 is of course more important. If, instead of adopting dual floating exchange rates, an economy decides to shift to the regime of single floating exchange rate but otherwise maintaining the basic features of the model, it has been shown by Frenkel and Rodriguez [5] that overshooting will definitely occur under certain circumstances. Therefore, a regime of dual floating exchange rates does have the expected merits of stabilizing the economy by preventing the commercial rate from overshooting. Moreover, it avoids the problem of foreign exchange reserves losses or accumulations which are the necessary by-products of the one-fixed-one-floating rate system. [ABSTRACT FROM AUTHOR]

In this paper we test the currency substitution hypothesis in the context of explaining observed inflation in the United States during the flexible exchange rate period, 1972-1982. To investigate the possible impact of currency substitution we estimate a reduced-form model of inflation using quarterly observations. In contrast, much of the previous work testing this hypothesis over the same time period has been based largely on annual data, yielding only a few degrees of freedom. Our investigation also brings together several approaches to test for currency substitution. More specifically, we use three procedures to capture international influences on U.S. inflation: McKinnon's [10] calculations of rest-of-world money growth, Spinelli's [19] approach to measuring rest-of-world money growth, and the change in the effective change rate, recently promoted by McKinnon [11] as the most appropriate variable to capture foreign influences. We also investigate the relative impacts of currency substitution on two measures of inflation; the GNP deflator and the producer price index (PPI). By examining these different approaches in one paper with one data set, our test of the currency substitution hypothesis is more complete and exhaustive than any of the previous studies. It has been asserted that the domestic demand for U.S. money is unstable due to the impact of foreign influences that generate a reallocation of assets within portfolios. Consequently, it is hypothesized that U.S. inflation during the floating exchange rate period cannot be explained adequately by U.S. money growth alone, but more appropriately by U.S. money growth plus a measure of rest-of-world money growth or changes in the effective exchange rate. [ABSTRACT FROM AUTHOR]

The general purpose of this paper is to analyze empirically sectoral price adjustment in the exchange rate adjustment process. Relative price changes may occur within a sector between countries, and within a country between sectors. Our main objective is to test the hypothesis that both kinds of relative price changes occur in the adjustment process to disturbances in money demand and supply. In particular, we expect that the relative prices among goods of different "tradedness"--ranging from perfectly traded to non-traded goods--are affected by such disturbances. Our second objective is to test empirically whether the nature of exchange rate adjustment is affected by the average speed of sectoral price adjustment towards the "law of one price" and whether the exchange rate "overshoots" purchasing power parity after monetary disturbances. [ABSTRACT FROM AUTHOR]

The purpose of the present paper is to analyze the effects of tariffs and transfers on the real exchange rate of a small country. In this theoretical endeavor we shall hold constant the prices in foreign countries. In this context it can easily be seen that the "real exchange rate" and the "ratio of the exchange rate to the PPP" are identical concepts, provided that the expenditure weights used in the index of domestic prices are the same as those used in the calculation of the PPP. Economic models of the relationships between tariffs and exchange rates and between transfers and exchange rates have usually not specified the factors of production. These models generate results that can be called the conventional wisdom of the profession, namely that both import tariffs and inward transfers cause a real appreciation of the home currency. [ABSTRACT FROM AUTHOR]