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International Monetary Fund

Abstract

This chapter discusses principles and consequences of the common agricultural policy (CAP) of the European Community (EC). It shows that agricultural pricing policies aimed at supporting farm incomes were already in place in EC member countries before the inception of the CAP; indeed, in the presence of these policies, the CAP was a logical consequence of the extension of the common market to the agricultural sector. Thus, the flaws of the CAP can be traced back to national policies and attitudes toward agriculture. Recognition of the burden of agricultural support on the rest of the economy, as well as the growing budgetary costs, has elicited a greater public interest in the CAP. Equally, the trade frictions caused by export subsidies have underlined the CAP's international implications. For these reasons, the member states appear more determined than hitherto to bring agricultural expenditure under control. Given the wider effects of the CAP both on EC economies and the international community, it is to be hoped that current efforts at reform will be successful.

International Monetary Fund

Abstract

This paper provides a survey of some issues concerning the evolution of the European Monetary System (EMS) in the context of increasingly integrated financial markets. It reviews the objectives of the EMS, its institutional structure, its perceived impact on key macroeconomic variables, and some criticisms of its current arrangements. It also describes the 1992 program to unify, inter alia, financial markets and then discusses the pressures that a more integrated financial marketplaces on country authorities and on financial firms. The prospective structural changes in European financial markets raise the issues of whether and how the EMS can continue to constitute a zone of monetary stability. Although the growing integration of financial markets is likely to increase the interdependence between monetary policies in the EMS countries, a nominal anchor could still be maintained by having the Bundesbank continue to lead the way on the course of monetary policy, or by formulating monetary policy on the basis of an index of traded goods prices, or through more far-ranging coordination of monetary policies.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The rapid increase in international trade and financial integration over the past decade and the growing importance of emerging markets in world trade and GDP have inspired the IMF to place stronger emphasis on multilateral surveillance, macro-financial linkages, and the implications of globalization. The IMF's Consultative Group on Exchange Rate Issues (CGER)--formed in the mid-1990s to provide exchange rate assessments for a number of advanced economies from a multilateral perspective--has therefore broadened its mandate to cover both key advanced economies and major emerging market economies. This Occasional Paper summarizes the methodologies that underpin the expanded analysis.

International Monetary Fund

Abstract

In its surveillance activities, the Fund is frequently confronted with the difficult problem of how to identify exchange rate behavior that is unrelated to underlying economic and financial conditions and, consequently, should be viewed with concern from a national or international standpoint.1 This paper considers the various issues related to this problem as it pertains to industrial countries, both those that have independently floating exchange rates and those that operate under other exchange arrangements.2 The main issues are (1) the considerations that are important in determining whether an exchange rate deviates substantially from its sustainable level; (2) the degree of confidence that can be attached to judgments of the sustainable exchange rate; and (3) the relevant policy implications from the standpoint of Fund surveillance. These issues have been discussed extensively in the past, and it is not the purpose of this paper to introduce new concepts. Rather, the intention is to survey the techniques that are typically employed by the Fund staff and to provide an analysis of their practical usefulness.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

Exchange rate surveillance has always been at the core of the IMF’s responsibilities. Throughout its existence, the Fund has striven to strengthen its framework for assessing exchange rates, adapting it to underlying macroeconomic and financial developments in member countries. As part of this mandate, since the mid-1990s the IMF Consultative Group on Exchange Rate Issues (CGER) has provided exchange rate assessments for a number of advanced economies from a multilateral perspective, with the aim of informing the country-specific analysis of the IMF’s Article IV staff reports and fostering multilateral consistency. These assessments are additional tools at the disposal of the IMF staff country desks, which are responsible for formulating exchange rate assessments as part of the Fund’s bilateral surveillance, another of the IMF’s core responsibilities.

International Monetary Fund

Abstract

Experience with currency movements in industrial countries that have floating exchange rates, diversified financial markets, and relatively unrestricted capital mobility suggests that many types of development can cause the exchange rate to deviate from the level that would be sustainable in the medium term on the basis of underlying economic and financial conditions. These considerations are reflected in the recent Report of the Working Group on Exchange Market Intervention, prepared by representatives of the seven major industrial countries, which states:

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The macroeconomic balance approach to exchange rate assessments consists of three steps. First, an equilibrium relationship between current account balances and a set of fundamentals is estimated with panel econometric techniques. Second, for each country, equilibrium current accounts (“current account norms”) are computed from this relationship as a function of the levels of fundamentals projected to prevail in the medium term. Third, the real exchange rate adjustment that would close the gap between the estimated current account norm and the underlying current account balance (i.e., the current account balance that would emerge at a zero output gap both domestically and in partner countries) is computed for each country.

Mr. Luca A Ricci, Mr. Jonathan David Ostry, Mr. Jaewoo Lee, Mr. Alessandro Prati, and Mr. Gian M Milesi-Ferretti

Abstract

The reduced-form equilibrium real exchange rate (ERER) approach to exchange rate assessment consists of three steps. First, panel regression techniques are used to estimate an equilibrium relationship between real exchange rates and a set of fundamentals. Second, equilibrium real exchange rates are computed as a function of the medium-term level of the fundamentals. Third, the magnitude of the exchange rate adjustment that would restore equilibrium is calculated directly as the difference between each country’s actual real exchange rate and the equilibrium value identified in the second step.

International Monetary Fund

Abstract

Perhaps the element that is most commonly taken into account in attempting to assess whether a country’s exchange rate is at an appropriate level is its price competitiveness. Such an assessment normally takes the form of a straightforward comparison of past movements in prices at home and abroad, after adjustment for exchange rate changes. If the comparison indicates that the country considered has experienced significant losses or gains in its price competitiveness in relation to a base period when its position was considered adequate, this finding is viewed as establishing a presumption that the current exchange rate is unsustainable.8 Sustainability can, of course, be restored through a change in the nominal exchange rate, a change in the level of domestic currency prices relative to those abroad, or some combination of the two. In many cases, a comparison of movements in production costs is made as a supplement, or an alternative, to a comparison of movements in prices. Indicators of relative prices or costs adjusted for exchange rate changes are here referred to as “real exchange rates.”

International Monetary Fund

Abstract

In its surveillance activities, the Fund is frequently confronted with the difficult problem of how to identify exchange rate behavior that is unrelated to underlying economic and financial conditions and, consequently, should be viewed with concern from a national or international standpoint. This paper considers the various issues related to this problem as it pertains to industrial countries, both those that have independently floating exchange rates and those that operate under other exchange arrangements.