Andrew Hughes Hallett

The Impact of Exchange Rate Uncertainty on the Level of Investment

Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit-Pindyck (1994) model, the authors find that there are situations where this will happen and situations where it does not. There are threshold effects, which allows them to identify when rising volatility would increase or decrease investment and also to identify which types of industries would gain, and which would suffer, from a move to fixed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected. Coauthors are Andrew Hughes Hallett, Jonathan Ireland, and Laura Piscitelli.

EMU in Reality: The Effect of a Common Monetary Policy on Economies with Different Transmission Mechanisms

The theory of optimal currency areas states that a single currency zone should have symmetry of shocks and structures across regions. Research on monetary union in Europe has either assumed these conditions to hold close enough not to cause problems, or has focussed on asymmetries in shocks. But what if economic structures and/or market responses differ between countries or regions? This paper examines the consequences of a single monetary policy when there are asymmetries in i) the monetary transmissions; ii) the wage/price transmissions; and iii) private sector asset holdings. We find the first and last destabilise the business cycle, and put countries out of phase with one another in a way that cannot be corrected by deficit constrained fiscal policies. The effect is to delay convergence.

How successfully do we measure capital flight? The empirical evidence from five developing countries

Economists have proposed several different techniques for measuring capital flight. Each technique differs significantly in its definition of what constitutes capital flight, principally on the limits to normal capital flows, how to capitalise investment income, and the inclusion of long term capital flight. Consequently estimates of the determinants and remedies for capital flight have been very mixed. Given that capital flight is not observable it is important to examine the information content and consistency between the different measures. This article uses three different techniques over five countries to make that comparison, and finds a limited amount of information in each measure but no obvious agreement between them. Econometric techniques which have been designed for measuring the ‘hidden economy’ of OECD countries is likely to offer a better way of measuring capital flight.

Regional Inequalities and the Business Cycle: An Explanation of the Rise in European Unemployment

DEMERTZIS M. and HUGHES HALLETT A. (1996) Regional inequalities and the business cycle: an explanation of the rise in European unemployment, Reg. Studies 30, 15–29. The introduction of a system of fixed exchange rates in Europe has succeeded in inducing price convergence amongst its participants, but at the same time has increased the divergence between their rates of unemployment. In this paper we attempt to measure the level of the inefficiency imposed on the labour markets as a result of having different labour market structures under one monetary policy, and then use these results to provide a new explanation for the secular rise in European unemployment based on the degree of labour market heterogeneities and the asymmetries in wage settings in each market. As a closer monetary union of its own regions, the UK is used as a comparison for the Europe-wide results. DEMERTZIS M. et HUGHES HALLET A. (1996) Les inegalites regionales et le cycle economique: une explication de la montee du chomage en Europe,...

A Spectral Analysis of the Short-End of the British Term Structure

Abstract In this paper, we show how to derive the spectra and cross-spectra of economic times series from the dynamic structure of an underlying econometric model. This allows us to conduct a proper frequency analysis of economic and financial variables on a limited sample of data, without it being ruled out by the large sample requirements of direct spectral estimation. We show, in particular, how this can be done for time-varying models and time-varying spectra. To demonstrate our technique in action, we use it to analyse the behaviour of British interest rates during and following the ERM crisis of 1992/3.

Exchange rate behaviour under the EMS regime: was there any systematic change?

Abstract Most empirical studies fail to detect any systematic effects of the EMS regime on the economic performance of member countries. This reveals the difficulty of constructing controlled experiments which can distinguish what is due to the EMS, from that due to common external pressures. We argue that the crucial step is to examine the exchange rates distribution, since no performance improvements will appear if exchange rate behaviour does not change within the EMS. We find that there are changes in the third and fourth moments which imply that EMS currencies have become more fragile and susceptible to shocks (particularly negative shocks) relative to non-EMS currencies.

Inflation Targeting as a Coordination Device

The paper analyses inflation targeting when two independent policy authorities (a central bank and a National Government) have divergent preferences for the optimal policy mix. We demonstrate that the main advantage of inflation targeting, as a policy regime, is that it represents a simple proxy for full coordination between policy authorities. Inflation targeting therefore helps because it reduces the conflicts between fiscal and monetary policy, expecially where there are strong “spillovers” between the two policies. These results are then tested, and largely validated, in a simulation framework using a small open economy calibrated model.

A monthly econometric model of the transmission of the Great Depression between the principal industrial economies

Abstract This article describes and estimates, with monthly data, a model of the economic interactions between the United States, the United Kingdom, France and Germany over the years 1927–1936. Despite the radically different economic environment, the model shows broadly similar qualitative and dynamic responses to policy instruments and other changes to those of multi-country models estimated on more recent data. The model is simulated to assess the causes of the Great Depression and the particular contribution of European and American policies to the slump. Optimum strategic policy equilibria are then computed. They point to the mismanagement of the US economy as the principal cause of the depression, although French and German policies were also harmful. British policymakers performed rather well, but their economy suffered because of the other countries’ policy errors.

Analyses in macroeconomic modelling

List of Contributors. Part One: Solution Methods. 1. Solution Methods and Non-Linear Forward-Looking Models M. Juillard, et al. 2. From Here to Eternity: The Robustness of Model Solutions to Imperfect Starting Values P. McAdam, A.H. Hallett. 3. Accelerating Non Linear Perfect Foresight Model Solution by Exploiting the Steady State Linearization G.S. Anderson. Part Two: Rational Expectations and Learning. 4. Modifying the Rational Expectations Assumption in a Large World Model S. Hall, S. Symansky. 5. Boundedly versus Procedurally Rational Expectations S. Moss, E.-M. Sent. 6. Instrument Rules, Inflation Forecast Rules and Optimal Control Rules when Expectations are Rational S. Holly, P. Turner. Part Three: Macrodynamics. 7. Asymptotic Hierarchies in an Economic Model C. Le Van, P. Malgrange. 8. Computational Methods for Macro Policy Analysis: Hall and Taylors Models in DUALI P.R. Mercado, D.A. Kendrick. 9. The Dynamical Analysis of Forward-Looking Models M. Juillard. Part Four: Long Run and Closures in Macro Models. 10. The Long Run in Macro Models: A Guide P. McAdam. 11. The Sensitivity of Solutions to Terminal Conditions: Simulating Permanent Shocks with QUEST II W. Roeger, J. in t Veld. 12. Solving Large Scale Models Under Alternative Policy Closures: the MSG2 Multi-Country Model W.J. McKibbin. Subject Index. Author Index.

Inflation Under Alternative Exchange Rate Regimes: What Happens When Countries Differ in Size?

A three-country model is used to analyze how country size affects inflation under different exchange rate regimes. Two countries, an anchor country (leader) and a pegging country (follower), are examined where the latter differs in size. We find that the leaders preference for floating over pegging is unaffected by the followers size except in the case where the follower is very small. However, as the follower gets smaller, the leaders inflation worsens under floating but improves under the single-currency peg. For the follower, as it gets smaller, its inflation performance improves when it floats its currency. But which regime is preferred is unclear.