payments problems and, eventually, depreciation of the official rate, as the authorities become unable to defend its original level. The uncertainty and fiscal subsidies accompanying the proliferation of exchange rates have often contributed to the inflation that the authorities attempted to avoid, as prices were adjusted to the scarcity of foreign exchange. Nor do multiple exchange systems seem to allow countries ultimately to avoid a uniformexchangeratechange; experience has shown that eventually the authorities are forced to simplify their practices and to reduce
banks. Although the central bank generally benefits from multiple exchange rate practices, the budget reaps the rewards of taxes on foreign transactions.
The Fund’s policies stated on the occasion of the 1984/85 discussions were based on the experience of its membership with multiple exchange rates. Most countries that have adopted multiple currency practices did so at a time of external payments difficulties. The underlying reason for a country to avoid the uniformexchangeratechange—normally a devaluation—that would be part of a systematic approach to solving
This chapter surveys major developments in Fund members’ restrictive practices affecting international trade and financial transactions. These practices take the form of either quantitative restrictions or price-related measures that involve implicit or explicit taxes and subsidies affecting international transactions. Most of the practices are described in detail in the country-specific reports that comprise the Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
This paper summarizes major measures taken in the international exchange and trade systems in 1988 and developments in exchange arrangements and the evolution of exchange rates. The exchange arrangements adopted by members since 1973 cover a broad spectrum of degrees of flexibility, from single-currency pegs to a freely floating system. Most countries have adopted arrangements that fall clearly into one or another of the major categories of the present classification system adopted by the IMF in 1982, and countries with dual markets usually have one market that is clearly more important than the other, which allows accurate classification by major market. Changes in IMF members' arrangements for their currencies during this decade have shown a distinct tendency to move toward more flexible arrangements and away from single-currency pegs, continuing a trend that began in the mid-1970s. A qualitative sense of the significance of the trend toward more flexible arrangements can be conveyed by the degree that world trade is affected by countries adopting different arrangements.
This section briefly reviews members’ payments and countertrade arrangements among themselves, as well as regional associations. Although bilateral payments arrangements have declined since the 1960s and now account for a small fraction of world trade, countertrade practices have become far more commonplace. In the area of regional arrangements, significant developments affecting formal regional and bilateral arrangements for trade and finance have taken place, in particular in industrial countries and South America.
the same effect on the home country’s trade balance as the set of actual changes in these prices. To calculate this notional uniformexchangeratechange, the actual change in the exchange rate vis-à-vis each foreign currency must be weighted by the effect on the home country’s trade balance of an isolated change in the price of that currency in a given proportion, say, by 1 per cent.
These trade balance effects are not, in general, likely to be proportional to the bilateral trade flows between the home country and its partner countries—neither to exports, nor
enjoys an increase in its nominal wealth following introduction of the fiscal proxy, so that the scheme duplicates the short-run capital-gains effects of devaluation. In the long run, however, the maintenance of a differential in effective exchange rates involves a permanent subsidy on lending abroad, and this will have implications for both the currency composition of portfolios and the equilibrium stock of capital, which are absent from a uniformexchangeratechange. In general, the long-run effects of such a subsidy are ambiguous; as Dornbusch (1975 b) has shown
The purpose of this paper is to formulate a model for developing countries that allows output, prices, international reserves, money, and government taxing and expenditure policies to be determined simultaneously. The model developed, which stresses the key role of monetary disequilibrium, is a formal representation of the theory underlying stabilization programs, including those devised by the IMF, that are implemented to combat the twin problems of inflation and an adverse balance of payments. Programs designed to achieve rapid results on the balance of payments via sharp deflation are likely to have significant and undesirable effects on output, employment, and factor incomes, particularly in the short run. Thus, the program may impose an excessive burden on a typical developing country both because incomes are already near the subsistence level and because the employment effect is likely to fall disproportionately on the fledgling industrial sector.
This chapter presents a review article on the purchasing power parity (PPP) theory of exchange rates. The PPP theory involves the ratio of two countries' price levels or price indices times a base period exchange rate as the most important variable determining the exchange rate, but it allows both for other explanatory variables and for random influences. Criticisms of PPP include the existence of tariffs and transport costs, the role of income in exchange rate determination, and the existence of noncurrent account items in the balance of payments. The direction of causality (prices to exchange rates) has also been called into question. Several kinds of tests of the PPP theory have appeared in the empirical literature. One test demonstrates that the ratio of PPP to the exchange rate is systematically related to differences in per capita income across countries. Other tests correlate time series of PPP and the exchange rate or perform a comparative-static comparison of the two variables over time.