CURRENT ISSUES IN INTERNATIONAL MONETARY ECONOMICS

Transcription

1 CURRENT ISSUES IN INTERNATIONAL MONETARY ECONOMICS

2 CURRENT ISSUES IN ECONOMICS General Editor: David Greenaway, University of Nottingham Vol. I Vol. 2 Vol. 3 Vol. 4 Current Issues in Microeconomics Edited by John D. Hey, University of York Current Issues in Macroeconomics Edited by David Greenaway, University of Nottingham Current Issues in Labour Economics Edited by David Sapsford, University of East Anglia, and Zafiris Tzannatos, University of Buckingham Current Issues in International Monetary Economics Edited by David T. Llewellyn and Chris Milner, Loughborough University Forthcoming Vol. 5 Current Issues in Public Sector Economics Edited by Peter Jackson, University of Leicester Vol. 6 Vol. 7 Vol. 8 Vol. 9 Current Issues in Development Economics Edited by V. N. Balusubramanyam, University of Leicester, and S. Lall, University of Oxford Current Issues in Industrial Economics Edited by John Cable, University College of Wales, Aberystwyth Current Issues in Monetary Economics Edited by K. Dowd and Mervyn K. Lewis, University of Nottingham Current Issues in Welfare Economics

3 Current Issues in International Monetary Economics Edited by David Llewellyn Professor of Money and Banking Loughborough University and Chris Milner Reader in Economics Loughborough University St. Martin's Press New York

4 Selection and editorial matter David T. Llewellyn and Chris Milner 1990 Individual chapters David T. Llewelyn and Chris Milner; Rodger Dornbusch; Michael Beenstock; Ronald MacDonald; Colin Kearney; David Currie; Andrew Dean; Nick Snowden; Robert Z. Aliber; and David T. Llewelyn 1990 Softcover reprint of the hardcover 1st edition All rights reserved. For information, write: Scholarly and Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y First published in the United States of America in 1990 ISBN ISBN (ebook) DOI / Library of Congress Cataloging-in-Publication Data Current issues in international monetary economics/edited by David Llewellyn and Chris Milner. p. cm.-(current issues in economics; vol. 4) Includes bibliographical references. I. Foreign exchange. 2. International finance. 3. Monetary policy. I. Llewellyn, David T. II. Milner, Chris. III. Series. HG3851.C '.042-dc CIP

5 Contents LIST OF FIGURES Vll LIST OF TABLES lx SERIES EDITOR'S PREFACE NOTES ON THE CONTRIBUTORS X xii Introduction: Current Issues and the Structure of the Book David T. Llewellyn and Chris Milner 2 Exchange Rate Economics Rudiger Dornbusch 3 Exchange Rate Dynamics Michael Beenstock Empirical Studies of Exchange Rate Determination Ronald MacDonald 63 5 Stabilisation Policy with Flexible Exchange Rates Colm Kearney I 0 I 6 International Policy Coordination David Currie Domestic and International Financial Imbalances and Adjustment Andrew Dean 149 v

6 Vl Contents 8 The Analysis of International Debt Nick Snowden Exchange Rate Arrangements Robert Z. A/iber 196 lo The International Monetary System David T. Llewellyn 213 END-NOTES 243 BIBLIOGRAPHY 247 NAME INDEX 266 SUBJECT INDEX 270

7 List of Figures 2.1 The real exchange rate effect of a transitory fiscal expansion Canada-US real exchange rate changes (per cent per month) Canada-US real exchange rate (index 1980 = I 00) US-German real exchange rate (CPI index 1980= 100) Forecast errors (percentages) Japanese export prices (index 1985: 2= 100) Capital goods prices (index 1980: I = I 00) Real commodity prices (index 1980 = 100) Real exchange rate movements and the real prices of commodities Major industrial countries: quarterly real effective exchange rates, Major industrial countries: monthly nominal effective exchange rates, Contemporaneous spot and forward rates: (a) dollar-pound; (b) dollar-mark The forward rate as a predictor of the spot rate: (a) dollar-pound: (b) dollar-mark The forward premium and the percentage change in the exchange rate: (a) dollar-pound; (b) dollar-mark Stabilisation policy in the simple 'postulated' model Stabilisation policy in the optimising model with Keynesian unemployment and perfect capital mobility Hamada diagram 127 vii

8 viii List of Figures 6.2 The consequences of European fiscal precommitment 8.1 Credit rationing and 'concerted' lending 10.1(a) Long-term nominal interest differential 10.1(b) US current account 10.2 US net international investment position

9 List of Tables 2.1 Variability of real exchange rates (coefficient of variation, monthly data) Frankel-Froot dollar-yen data (per cent per year, sample average) The effect of budget deficits on the current account (REX=ao+a 1 (r*-r)+a 2 b+a 3 b*) Illustrative exchange rate dynamic (S 0 = 0) Minimum and maximum monthly percentage exchange rate changes Standard deviations of monthly percentage changes in the exchange rate and other macroeconomic variables A simple 'postulated' open economy macromodel An optimising open economy macromodel Stabilisation policy in 'postulated' and optimising open economy models with perfect capital mobility The evolution of current-account imbalances Current-account balances as a percentage of GNP in selected groups of countries, LDC net resource inflow by source and stock of outstanding debt 1970 and 1982 ($ billions in current values) Current account imbalances ($billion) Global reserve developments ($ billion) Currency composition of foreign exchange reserves (percentage of total) 237 IX

10 Series Editor's Preface The Current Issues Series has slightly unusual origins. Current Issues in International Trade, which Macmillan published in 1987 and which turned out to be the pilot for the series was in fact 'conceived' in the Horton Hospital, Banbury, and 'delivered' (in the sense of completed) in the Hilton International in Nicosia! The reader may be struck by the thought that a more worthwhile and enjoyable production process would start and finish the other way around. I agree! Be that as it may, that is how the series started. As I said in the Preface to Current Issues in International Trade the reason for its creation was the difficulty of finding suitable references on 'frontier issues' for undergraduate students. Many of the issues which excite professional economists and which dominate the journal literature take quite a time to percolate down into texts, hence the need for a volume of Current Issues. The reception which Current Issues in International Trade received persuaded me that it may be worth doing something similar for other subject areas we teach. Macmillan agreed with my judgement, hence the series. Thus each volume in this series is intended to take readers to the 'frontier' of the particular subject area. Each volume contains ten essays, nine of which deal with specific current issues, and one which provides a general overview, setting the relevant current issues in the context of other recent developments. As Series Editor the main challenge I faced was finding suitable editors for each of the volumes- the best people are generally the busiest! I believe however that I have been fortunate in having such an impressive and experienced team of editors with the necessary skills and reputation to persuade first-class authors to participate. I would like to thank all of them for their cooperation and assistance in the development of the series. Like me all of them will, I am sure, X

11 Series Editor's Preface XI hope that this series provides a useful service to undergraduate and postgraduate students as well as faculty. With regard to the present volume, we know that international monetary economics has been an area of profound change in recent years. As the Editors acknowledge in their introduction, this has been fashioned partly by institutional developments (such as the globalisation of asset markets and the shift to flexible exchange rates), and partly by 'technical change' in the economics profession. Consequently the issues which preoccupy analysts in this area, and the way in which they think about those issues has altered markedly. These changes are captured well in this volume. The issues covered include the modelling of exchange rate dynamics, empirical aspects of exchange rate movements, policy coordination, and international debt. The Editors are to be commended on their choice of topics. They have provided us with a well balanced blend of theory, empirics and policy analysis- a blend which conveys the richness and excitement of current issues in international monetary economics. The authors are also to be congratulated on producing essays of such a consistently high standard. The issues addressed are often complex yet the authors have still managed to provide us with a digestible volume. I have enjoyed working on this volume and have certainly learned from it. I hope others have a similar experience. University of Nottingham DAVID GREENAWAY

12 Notes on the Contributors Robert Aliber is Professor of International Economics and Finance, University of Chicago. Michael Beenstock is Professor of Economics, The Hebrew University of Jerusalem. David Currie is Professor of Economics and Director of the Centre for Economic Forecasting, London Business School. Andrew Dean is in the Balance of Payments Division of the Organisation for Economic Cooperation and Development. Rudiger Dornbusch is Professor of Economics, Massachusetts Institute of Technology. Colm Kearney is Lecturer in Economics, University of New South Wales. David T. Llewellyn is Professor of Money and Banking, Loughborough University. Ronald MacDonald is Professor of Economics, University of Dundee. Chris Milner is Reader in Economics, Loughborough University. Nick Snowden is Lecturer in Economics, University of Lancaster. XII