Alan C. Stockman

Anticipated inflation and the capital stock in a cash in-advance economy

Abstract An economy is constructed in which the steady-state capital stock is inversely related to the rate of inflation, as a result that is directly opposite the usual conclusion.

Business cycles and the exchange-rate regime : Some international evidence

This paper investigates empirically the differences in time?series behavior of key economic aggregates under alternative exchange rate systems. We use a postwar sample of 49 countries to compare the behavior of output. consumption, trade flows, government consumption spending, and real exchange rates under alternative exchange rate systems (pegged, floating, and systems such as the EMS). We then examine evidence from two particular episodes, involving Canada and Ireland, of changes in the exchange rate system. Aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems, we find little evidence of systematic differences in the behavior of other macroeconomic aggregates or international trade flows under alternative exchange rate systems. These results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities.

Exchange-rate dynamics

Publisher Summary This chapter discusses the dynamic behavior of exchange rates. It focuses on both the exchange rates response to exogenous disturbances and the relation between exchange-rate movements and movements in such endogenous variables as nominal and relative prices, interest rates, output, and the current account. The chapter discusses an ideal treatment of exchange-rate dynamics by summarizing the relevant characteristics of the empirical record. All key features of the stochastic processes that appear to govern exchange rates and other statistically related economic variables have been reviewed in the chapter. It also presents a set of models that are compatible with at least some of the observed relationships. The chapter introduces market frictions so that the role of endogenous output fluctuations can be studied. The assumption of domestic price stickiness reinforces both the correlation between exchange-rate and terms-of-trade changes and the high short-run variability of the exchange rate compared to that of international price-level ratios. Finally, the chapter examines deterministic and stochastic models in which individual behavior is derived from an explicit intertemporal optimization problem.

Real exchange rates under alternative nominal exchange-rate systems

Abstract The paper develops an equilibrium model of the determination of exchange rates, the relative price of nontraded goods, and the current account. The focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange-rate system is neutral with respect to real variables in the economy. The model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates. An econometric investigation of the raltion between the exchange-rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis.

Real Exchange Rate Variability Under Pegged and Floating Nominal Exchange Rate Systems: an Equilibrium Theory

This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for balance-of-payments purposes under pegged exchange rates. In particular. these restrictions become more likely during periods of time when countries suffer losses of international reserves than might. without policy changes. lead to a balance-of-payments crisis. This covariation of restrictions with reserve changes implies that real exchange rates will vary less under pegged than under floating exchange rates.

The effects of real and monetary shocks in a business cycle model with some sticky prices

AN ESTABLISHED CHARACTERISTIC of macroeconomic fluctuations is the strong positive correlation between variations in the money stock and variations in production, income, and employment at business cycle frequencies. This finding has motivated an enormous literature that has studied the effects of monetary policy disturbances on the real economy, and in particular the role of money in business cycles. Several classes of monetary business cycle models have been developed that feature different channels through which monetary policy can have real effects. One model that has been used widely is the Keynesian model, in which monetary shocks can have important effects on allocations because there are nominal rigidities in prices and/or wages. The Keynesian assumption of sticky nominal prices is often motivated by reference to studies that have analyzed the frequency of nominal price changes. The broad conclusion that emerges from this literature is that there are a number of goods that have prices that appear to change infrequently. For example, Carlton (1989) has reported slow changes in nominal transactions prices for producers goods even without long-term relationships between buyers and sellers, and has documented that delivery lags and other product characteristics frequently change before nominal prces change. Similarly, Blinders survey (1991) of firms shows that prices for many goods change only about once per year. While this evidence

Self-Fulfilling Expectations, Speculative Attack, and Capital Controls

This paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime. It is shown that if there exists a nonzero probability that the policymakers response to a significant decrease in official foreign reserves will be the introduction of controls, a speculative attack may occur even when current and expected monetary policy is consistent with a permanently viable, control-free, fixed exchange rate regime. Consequently, capital controls may be the outcome of self-fulfilling expectations rather than the result of imprudent economic policies. Copyright 1993 by Ohio State University Press.(This abstract was borrowed from another version of this item.)

Capital flows, investment, and exchange rates

This paper incorporates international capital flows into a two-country, monetary-general-equilibrium model of asset prices with investment and production. We use the model to calculate theoretical covariances between investment, the current account, the exchange rate, and the terms of trade.These covariances depend upon the coefficient of relative risk-aversion, the magnitude and sign of a countrys net international indebtedness, other properties of tastes and technologies, and the stochastic processes on disturbances to productivity and monetary growth rates. International capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets. The dynamic, stochastic relations between capital flows, exchange rates, investment, and the terms of trade are critically dependent on optimal portfolio allocations and the stochastic behavior of asset prices on international financial markets.

Choosing an exchange-rate system

Abstract The focus of academic discussions of exchange rate policy has shifted in recent years. The new literature on exchange rate regime choice emphasizes considerations relating to the problems of credibility in exchange rate targeting and the connections between exchange rate regime choices and choices of monetary and fiscal policy. Arguments for exchange rate targeting are reviewed. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.

Short-Run Independence of Monetary Policy Under Pegged Exchange Rates and Effects of Money on Exchange Rates and Interest Rates

Economists generally assert that countries sacrifice monetary independence when they peg their exchange rates. At the same time, central bankers frequently assert that pegging an exchange rate does not eliminate the independence of monetary policy. This paper examines the effects of money-supply changes on exchange rates, interest rates, and production in an optimizing two-country model in which some sectors of the economy have predetermined nominal prices in the short run and other sectors have flexible prices. Money-supply shocks have liquidity effects both within and across countries and induce a cross-country real-interest differential. The model predicts that liquidity effects are highly non-linear and are not likely to be captured well empirically by linear models, particularly those involving only a single country. The most striking implication of the model is that countries have a degree of short-run independence of monetary policy even under pegged exchange rates.