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MIGUEL A. SAVASTANO

The dynamics of the collapse of a crawling exchange rate in the presence of an explicit link between the fiscal deficit and domestic credit is investigated. Such an exchange rate regime is generally characterized by two potential steady-state equilibria, which introduce an ex ante indeterminacy in the timing and magnitude of a speculative attack on international reserves in the presence of a sustained inconsistency between the country’s fiscal and exchange rate policies. The paper discusses the conditions that define the actual timing of the regime’s breakdown.

LUC LERUTH, REMI PARIS, and IVAN RUZICKA

This paper examines the role and impact of taxation on sustainable forest management. It is shown that fiscal instruments neither reinforce nor substitute for traditional regulatory approaches and can actually undermine sustainability. The paper uses the reasoning at the root of the Faustmann solution to draw conclusions on the incentives for sustainable tropical forest exploitation. It proposes a bond mechanism as an alternative market-based instrument to encourage sustainable forest logging while reducing monitoring costs.

J. J. POLAK

I WOULD LIKE to respond to a question posed by the Managing Director in his opening remarks as to why the Fund has found it so difficult to make pronouncements on the exchange rates of major currencies. Some ten years ago the Fund did not hesitate to make such a pronouncement. For example, in August 1971 the staff felt sure enough of its ground to propose a new set of exchange rates. In the event, the rates proposed proved wrong: the changes were too small and did not produce enough adjustment. There was, however, a rather comforting explanation: it was not that the Fund’s model was wrong but that the size of the 1971 disequilibrium had been seriously underestimated. In the mid-1970s, the Fund staff started to calculate “underlying balances” for the major countries—i.e., balances that would materialize over the medium term with present exchange rates and at reasonably high levels of activity in all countries. The exercise proved generally right in predicting the fall in the deutsche mark/dollar rate from 1976 to September 1978 and it also correctly suggested that the further sharp fall of the dollar in October 1978 went too far. But the model was never good at predicting what would happen to the yen, and it broke down for the dollar in 1980. Since then, interest rates have been so dominant and so volatile over so long a time, with such wide-ranging effects, and with so much bandwagon riding in both the capital and the foreign exchange markets, that the kind of medium-term analysis in which the Fund had engaged has become largely irrelevant to what happens in exchange markets for the short term and also to what can be made to happen through, for example, intervention or any policy of bands or target zones.

AHSAN H. MANSUR

The purpose of this paper is to review a number of approaches that are available for determining an appropriate exchange rate level for a developing economy.1 Developing countries in recent years have been experiencing increasing balance of payments difficulties that, in many instances, are attributable to their foreign exchange regimes. In a typical situation, the government maintains an exchange rate fixed at an unrealistic level, while the level and composition of imports are determined by quantitative restrictions that give rise to the misallocation of resources. In an effort to overcome these problems and to re-establish conditions for reasonable economic growth and a sustainable balance of payments position, many countries resort to adjustment programs, including exchange rate actions. However, before any exchange rate action can take place, the appropriate new level for the exchange rate must be determined. This paper outlines a series of approaches that, in combination, can be used to address the issue.

Mick Silver

Unit value export and import indices compiled from returns to customs authorities are often used as surrogates for price indices in the analysis of inflation transmission, terms of trade (effects), and to deflate import and export value series to derive volume series. Their widespread use is mainly due to their low cost relative to establishment price surveys. This paper provides evidence of substantial errors and bias in their representation of such price changes. Their continued use would mislead economic analysis. The paper considers the efficacy of alternative strategies for their improvement, and argues for a move to establishment-based price surveys.

J. LAWRENCE BROZ, JEFFRY FRIEDEN, and STEPHEN WEYMOUTH

Analyses of the political economy of exchange rate policy posit that firms and individuals in different sectors of the economy have distinct policy attitudes toward the level and stability of the exchange rate. Most such approaches hypothesize that internationally exposed firms prefer more stable currencies and that producers of tradables prefer a relatively depreciated real exchange rate. As sensible as such expectations may be, there are few direct empirical tests of them. This paper offers micro-level, cross-national evidence on sectoral attitudes about the exchange rate. Using firm-level data from the World Bank’s World Business Environment Survey, we find systematic patterns linking sector of economic activity to exchange rate policy positions. Owners and managers of firms producing tradable goods prefer greater stability of the exchange rate: in countries with a floating currency, manufacturers are more likely to report that the exchange rate causes problems for their business. With respect to the level of the exchange rate, we find that tradables producers—particularly manufacturers and export producers—are more likely to be unhappy following an appreciation of the real exchange rate than are firms in nontradable sectors (services and construction). These findings confirm theoretical expectations about the relationship between economic position and currency policy preferences. IMF Staff Papers (2008) 55, 417–144. doi:10.1057/imfsp.2008.16; published online 17 June 2008

JACQUES J. POLAK

This paper reviews the development over the past fifty years in the IMF of research on, and policy attitudes toward, exchange rate matters. Three successive phases are noted. In the first ten to fifteen years, within the confines of the par value system, research was mainly focused on achieving a better understanding of the working of exchange rates. From the early 1960s to the mid-1980s, the focus shifted toward discovering and, if possible, enforcing “correct” exchange rates. More recently, the limitations of that approach have led to increased attention to the merits of alternative exchange rate regimes, both among the industrial countries and for developing countries.

P. Nicholas Snowden

This paper uses microeconomic panel data to examine differences in the cyclical variability of employment, hours, and real wages for skilled and unskilled workers. Contrary to conventional wisdom, it finds that, at the aggregate level, skilled and unskilled workers are subject to the same degree of cyclical variation in wages. However, the quality of labor input is found to rise in recessions, inducing a countercyclical bias in aggregate measures of the real wage. The paper also finds substantial differences across industries in the cyclical variation of employment, hours, and wage differentials, indicating important interindustry differences in labor contracting.

HAROLD JAMES

The article discusses the evolution of surveillance from the rules-based Bretton Woods regime to the multilateral surveillance of the IMF, the G-5 and G-7 Finance Ministers, and the G-7 summit. The creation of a mechanism for collecting and analyzing data and providing forecasts through the World Economic Outlook exercise allowed a formulation of a policy response to the economic shocks of the 1970s and 1980s. James argues that the supply of information came to play a central role in guiding choices on economic policy; and that publicly available information is critical if market panics and crises are to be avoided.