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Eugene A. Birnbaum

As a part of the proceedings of the Eleventh Annual Meeting of the Board of Governors of the International Monetary Fund, an Informal Session on “Recent Developments in Monetary Analysis” was held on September 25, 1956. The three papers which were presented at that Session by Dr. M. W. Holtrop, President of De Nederlandsche Bank, Dr. Paolo Baffi, Economic Adviser to Banca d’Italia, and Dr. Ralph A. Young, Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve System, are reproduced below, together with the background paper, “Monetary Analyses,” prepared by the Statistics Division of the Research and Statistics Department of the International Monetary Fund.


This paper is an empirical study of fiscal policy in countries with extreme monetary regimes. We study members of multilateral currency unions, dollarized countries that officially use the money of another country, and countries using currency boards. We find that belonging to an international common currency area is not associated with fiscal discipline; if anything, spending and taxes are higher inside currency unions. This effect is especially pronounced for dollarized countries that unilaterally adopt the currency of another country. Currency boards are associated with fiscal restraint.


Theoretical and empirical studies of aggregate import behavior generally show the flow of imports to be determined chiefly by aggregate economic activity and by import prices relative to prices of domestically produced substitutes. For many less developed countries, however, this relationship is questionable because of the effects of trade and exchange restrictions. For these countries, imports consist largely of producer goods—capital equipment, maintenance items, and imported components—and there are no adequate domestic substitutes. If restrictions are used to limit imports, there will be a tendency for imports to determine output, rather than the reverse, particularly in the manufacturing sector.


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


Uncertainty about the export earnings accruing to a country (sometimes referred to as export instability) is an important source of macroeconomic uncertainty in many developing countries. Theory predicts that countries should react to increases in this form of uncertainty by increasing their level of savings. The resulting asset accumulations would then act as the country’s insurance against the greater riskiness in its income stream. This paper tests this implication for a large sample of developing countries. In general, the results suggest that developing countries have indeed responded to increases in export instability by building up precautionary savings balances.


Beginning with the papers by Calvo and Reinhart (2002) and Levy Yeyati and Sturzenegger (2001), there has been growing recognition of a disconnect between what emerging economies say they do in exchange rate policy (words), and what they do in practice (deeds). More specifically, a “fear of floating” behavior has been identified, whereby countries that classify themselves as floating exchange rate regimes intervene quite vigorously over time. While many persuasive arguments have been offered as to why countries intervene, the question remains as to why intervening countries continue to classify their regimes as floating. Thus, concurrently with fear of floating, there seems to be a “fear of declaring.” This paper examines one possible reason for fear of declaring: that international capital markets might reward countries that are classified toward the flexible end of the spectrum. Based on the JPMorgan Emerging Market Bond Index spread, we use a panel data approach that exploits both time and cross-country variability. With some qualifications, we find that spreads are lower in countries that have a fixed exchange rate regime, whether de jure or de facto, implying that there is no evidence that markets punish fear of floating. One possible explanation for this puzzle—that is, countries intervene but say that they do not, even though markets appear to be at a minimum, indifferent to intervention—arises from the fact that there is evidence that de jure floating regimes may fare better in crisis situations. IMF Staff Papers (2008) 55, 445–480. doi:10.1057/imfsp.2008.14


It is widely agreed that the primary objective of any reform of the international arrangements on the supply of reserves should be to establish control over the global volume of liquidity, with a view to ensuring that such control will be conducive to stable growth of the world economy. However, the long-standing academic discussion of “seigniorage,” the practical concern of national officials to safeguard the interest earnings on their reserves, and the campaign by the developing countries to establish a link, all attest to the importance of the financial implications arising from the selection of a set of reserve supply arrangements. This is the subject explored in the present paper.

Hannan Ezekiel and Chandrakant Patel

THE JAPANESE BALANCE OF PAYMENTS in the postwar period began to show a tendency to fluctuate in 1953, when it moved abruptly into deficit. Between 1952 and 1958, there were two cycles in Japan’s balance of payments. These cycles were examined in considerable detail by Narvekar,1 who brought out, on the basis of annual data, the interrelations between the domestic and international factors that were reflected in these movements in Japan’s external balance. The present paper traces the fluctuations in Japan’s balance of payments since 1959 and examines some of their characteristics. For this purpose, it draws on quarterly data on Japan’s balance of payments now available for the period beginning 1961 and estimated by the authors for 1959 and 1960. However, it does not attempt to relate these fluctuations in detail to developments in domestic or international demand and supply conditions.

International Monetary Fund. Research Dept.
This paper explains the features of the Communaute Financiere Africaine (CFA) Franc system. All CFA countries belong to one of three monetary systems. Although their statutes and functions differ somewhat, the three central banks have various common features. All three central banks are authorized to extend short-term and medium-term credit to the private sector. Many the commercial banks operating in the CFA countries are French banks with head offices in Paris. The credit operations of the commercial banks in the CFA countries are largely dependent upon the rediscount facilities offered by the central banks. The Bank is the sole authority for issuing CFA currency in the countries of French Equatorial Africa and in Cameroon. The exchange regulations applied in the CFA countries are patterned on those of France, with adaptations decided upon by local authorities according to local conditions and requirements. While exchange transactions with the other franc area countries generally are free, those with the non-franc area are subject to licensing.
International Monetary Fund. Research Dept.
This paper explores wage-price link in a prolonged inflation. A fixed tie between wages and prices must have significant effects in any economy. A wage-price link of the type discussed in this paper assumes that wages will be adjusted for any rise in consumer prices, subject to certain safeguards. This will protect wage earners against any significant fall in real wages arising from investment inflation. For a free economy, in which economic adjustments are induced by changes in prices and wages, the imposition of the degree of rigidity implied by this association is of far-reaching importance. in several countries, the use of wage-price links is a consequence of the fear of labor that real wages will be adversely affected by inflation. Although the basic causes of inflation vary widely in different countries and at different times, the process of inflation always shows similar characteristics. In an economy which is functioning properly, the distribution and use of the gross national product should result in an aggregate demand for goods and services that tend to equal the available supply of goods and services at approximately stable prices.