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Delano Villanueva

RECENT EMPIRICAL STUDIES of the demand for money have - applied distributed lag models to specifications of monetary behavior. One such study by Joseph Adekunle 1 focused on the manner in which adaptive expectations affect portfolio behavior. The present paper is a further investigation into the adaptive expectation model of the demand for money.

Mr. Stephen S. Golub

This paper uses a Ricardian framework to clarify the role of micro–economic and macroeconomic factors governing the time–series and cross–sectional behavior of sectoral trade balances. Unit labor costs and trade balances are calculated for several sectors for the seven major industrial countries. The time–series and cross-sectional variation in sectoral unit labor costs is decomposed into relative productivity, wage differentials, and exchange rate variations. The main findings are that changes over time in sectoral trade balances, especially for the United States and Japan, are quite well explained by the evolution of unit labor cost, suggesting that trade patterns conform to comparative advantage. The cross–sectional results are, however, less conclusive.

Jacques R. Artus

THE PRESENT STUDY is an attempt to make a systematic analysis of the short-run determinants of international travel flows by specifying and estimating a complete world travel model. International travel is similar to international trade: it can be described by a system of bilateral and multilateral relationships in which an import of foreign travel services by one country corresponds to an export of such services by another country. Thus, the structure of the world travel model presented in this study is to a large extent similar to the structure of existing world trade models.1 General conceptual problems that are met in specifying such models have already been discussed in the economic literature and will not be reviewed here.2 The present model can be employed either for forecasting for one or two years ahead the foreign travel expenditures and the receipts from foreign visitors of certain countries or to analyze the effects of certain policy changes on international travel. Forecasts for 1972 and estimates of the effects of the changes in exchange rates that occurred in 1970 and 1971 are presented in Appendix II.

Mr. Victor E. Argy and Michael Porter

THIS PAPER explicitly incorporates the forward exchange market into a model of a small open economy under perfect capital mobility. It is shown that the degree to which the forward rate responds to movements in the spot exchange rate is important in determining the qualitative and quantitative impacts of monetary and fiscal policies.2 Additionally, the effect of exogenous disturbances both to the demand for money and to the capital and current accounts in the balance of payments is examined. The analysis is applied to three foreign exchange regimes: rigidly fixed, completely flexible, and dual—the last system being one in which the commercial exchange rate is fixed and the financial exchange rate is flexible. Although we are not convinced that it will be administratively possible to have divergent exchange rates in the current and capital accounts,3 we believe it a useful exercise to examine the properties of an “ideal” version of a dual exchange rate system. In a final section, the implications of the analysis for a regime intermediate between fixed and flexible rates, one entailing wider bands, are discussed briefly.

Carol C. Bertaut, Steven B. Kamin, and Charles P. Thomas

This paper addresses three questions about prospects for the U.S. current account deficit. First, is it sustainable in the long term? Projections of a detailed model of the U.S. balance of payments suggest that the current account deficit will resume widening and external indebtedness will continue to expand. Second, how long will it take for indebtedness to rise sufficiently to prompt some pullback by global investors? We project that external debt, net investment income, and the share of U.S. claims in foreigners’ portfolios will take many years to reach levels that would test global investors’ willingness to extend financing. Finally, if and when levels of sustainable debt burden are breached, how readily would asset prices respond and the current account start to narrow? We find little evidence that, as countries’ indebtedness rises, the changes in asset prices and exchange rates needed to correct the current account materialize all that rapidly.

International Monetary Fund. Research Dept.
This paper incorporates the forward exchange market into a model of a small open economy under perfect capital mobility. It is shown that the degree to which the forward rate responds to movements in the spot exchange rate is important in determining the qualitative and quantitative impacts of monetary and fiscal policies. Additionally, the effect of exogenous disturbances both to the demand for money and to the capital and current accounts in the balance of payments is examined. The analysis is applied to three foreign exchange regimes: rigidly fixed, completely flexible, and dual—the last system being one in which the commercial exchange rate is fixed, and the financial exchange rate is flexible. The paper focuses attention on the effects of monetary and fiscal policies in a regime of flexible exchange rates under perfect capital mobility. The model can be interpreted to embody the case in which speculators hold uncertain expectations, which are reflected in a less than infinitely elastic demand for forward funds at a given expected future spot rate. A more complete analysis would also allow for the fact that the forward rate would be determined not only by the joint actions of pure arbitrageurs and pure speculators but also by uncovered arbitrage, by traders, and by the possibility of intervention by the monetary authorities.
International Monetary Fund. Research Dept.
This paper discusses the implications for credit policy of changes in the income velocity of money; it neglects other policy elements of financial programs unless they have a direct bearing on velocity changes. Control over credit expansion by domestic banks is used to influence expenditure decisions, since the availability of credit has a strong impact on expenditures on domestic and foreign goods and services and, possibly, on net capital flows and, therefore, on the balance of payments. The paper also describes some relationships between monetary and national income accounts in order to identify the changes in velocity that must be considered in determining credit policies. The relevance of incorporating lags into the demand for money function has been mentioned earlier. Lags in the formation of expectations within a country usually can be expected to change only slowly over time and, therefore, can be assumed constant in the estimation of the demand for money function.
International Monetary Fund. Research Dept.
This paper examines factors affecting saving, policy tools, and tax reform. The literature on factors affecting saving and capital formation in industrialized countries is reviewed, and measurement problems are examined. The effect on the saving rate of real rates of return, income redistribution, allocation of saving between corporations and individuals, growth of public and private pension plans, tax incentives, the bequest motive, energy prices, and inflation is considered. The limited tools available to policymakers to affect savings are discussed.
International Monetary Fund. Research Dept.
This paper deals with liberalization and the evolution of output during the transition from plan to market. It explains why strong liberalization leads to a comparatively steep fall in output early in the transition, but a relatively strong recovery later on. Because it takes time to restructure the capital stock inherited from the old system, liberalization initially leads to transitional unemployment of capital and the contraction of the old enterprise sector. By making room quickly for the new, more efficient enterprises, however, liberalization also sets the stage for recovery and a much higher level of income in the medium term. [JEL E23, P21, P27, P52]