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Delano P. 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.


Two dual exchange rale regimes are compared. Under one, the official market clears through changes in international reserves. Under the other, the central bank implements a rationing scheme so as to keep international reserves constant. The paper discusses the effects on inflation, the balance of payments, the real exchange rate, and the spread between the free and the official exchange rate of various economic policies, including exchange rate policy, fiscal policy, and unification of the exchange markets. It concludes that the steady-state effects for most of those policies are qualitatively the same under both regimes.[JEL F31, F41]

Mr. Robert P Flood

In this paper we examine compensation schemes that prevent a threat of secession by any of a country’s regions. We prove that, under quite general assumptions on the distribution of citizens’ preferences, there exist transfer schemes that are secession-proof. Moreover, we show that these compensation schemes entail a degree of partial equalization among regions: the gap between advantaged regions and disadvantaged regions has to be reduced but it should never be completely eliminated. We demonstrate that in the case of a uniform distribution of the nation’s citizens, the secession-proof conditions generate the 50 percent compensation rule for disadvantaged regions. [JEL D70, H20, H73]

Donald G. Badger

The balance of payments, in its modern sense, may be defined as a system of accounts in which the accounting entity is a country or region and the entries refer to all economic transactions between residents of the country or region and residents of the rest of the world. The term “economic transactions” is used here in a broad sense to include transfers of goods, the rendering of services, and transfers of capital items, whether or not a quid pro quo is given. The quid pro quo may take the form either of payment in money or another capital item (including a promise to pay) or of payment in kind, that is in the form of goods and services. Transactions in which there is a quid pro quo may be described as two-way transactions, and those in which there is not, as one-way transactions. Two-way transactions are recorded by means of equal credit and debit entries to indicate the two sides of the transaction. For one-way transactions, the one side is recorded in the usual way and the double-entry system is preserved by offsetting this entry by a contra-entry under a heading described as “donations” or “unilateral transfers.”

Maria Soledad Martinez Peria, Andrew Powell, and Ivanna Vladkova-Hollar

The significant rise in foreign bank claims observed during the 1990s, following their steep decline during the 1980s debt crisis, reignited interest in understanding the behavior of these flows. This paper analyzes changes in foreign bank claims on the Latin American private sector over the period 1985–2000. We find that banks transmit shocks from their home countries (where banks' headquarters are located) and that changes in claims on individual host countries (those that receive claims) are correlated with aggregate changes in claims on other countries. However, over time, we observe that foreign bank claims have become less responsive to external factors. Also, we present evidence that the sensitivity of foreign bank claims to host factors diminishes, as banks' aggregate exposure rises. Finally, we find that foreign bank claims react more to positive than to negative host shocks and are not significantly curtailed during crises.

Zoran Hodjera

IN ASSESSING THE STRENGTH of a country’s balance of payments and reserve position, it is generally not sufficient merely to take into account gains and losses of reserves over a past period. Prospective developments of the country’s balance of payments must be evaluated as well, which means that some projection, however informal its methodology may be, of the country’s balance of payments must be attempted. In making such assessment it has been found convenient to pay particular attention to those balance of payments components that tend to change only gradually in response to the relatively slow adjustment in the economic and financial structure of the country and of its trading partners to domestic developments or to policy measures designed to reduce balance of payments deficits or surpluses. Other components that are apt to change rapidly in response to more transitory stimuli, such as the effect of various instruments of monetary policy on short-term capital flows, changes in expectations wtih regard to spot and forward exchange rates or to the par value of the currency, and temporary financing or other disturbances, are considered less significant for longer term prospects.