Constance Smith

Stock markets and the exchange rate: A multi-country approach

Abstract A general model of optimal choice over risky assets is used to derive an estimable exchange rate equation which is then applied to the German mark-U.S. dollar and Japanese yen-U.S. dollar exchange rates. Previous models which exclude equities find that government bond and/or money stocks have a weak effect on exchange rates, a result that is also found here. By contrast, equity values are shown to have a significant effect on the value of the German mark-U.S. dollar and Japanese yen U.S. dollar exchange rates over the period 1974 to 1988.

Government debt spillovers and creditworthiness in a federation

Estimates are presented for the impact of debt accumulation by the central and subcentral governments of a federation on the creditworthiness of other federation member governments. The estimates, calculated using an ordered probit model and Canadian provincial data, indicate that debt accumulation by the central government has reduced the creditworthiness of indebted provincial governments. Interprovincial debt accumulation effects are negative but relatively small, except for the debt of the largest province, which has a strong positive effect on the creditworthiness of the other provinces. These findings may have implications for other federations and associated jurisdictions, such as the European Union.

Exchange rate variation, commodity price variation and the implications for international trade

Abstract A commonly-cited disadvantage of floating exchange rates is that a fluctuating exchange rate reduces international trade when firm owners are risk-averse. Risk-averse firm owners are concerned with the variation in the real domestic currency price of the good they export or import. This price variation depends on exchange rate variation, but also on a goods foreign currency price variation, domestic price level variation, and the covariation between these three variables. The empirical results presented here show that, for many commodities, floating exchange rates did not cause a significant increase in overall real domestic currency price variation.

Equities and the UK exchange rate

A general model of optimal choice over risky assets is used to derive an estimable exchange rate equation which is then applied to the UK pound–US dollar exchange rate. Previous models which exclude equities find that government bond and/or money stocks have a weak effect on exchange rates, a result that is also found here. By contrast, equity values are shown to have a significant effect on the value of the pound–dollar exchange rate over the period 1974Q1 to 1988Q3.

Energy Prices and Alberta Government Revenue Volatility

Alberta government needs a revamped resource revenue stabilization fund to overcome the effects of wild swings in resource revenue and spending.Energy prices change substantially and unpredictably, causing revenue planning trouble for the Alberta government. Adjusting to these movements typically involves economic, social, and political costs that need to be factored into the government’s fiscal outlook. The best option for handling this is a resource revenue stabilization fund that collects a fixed proportion of resource revenue each year, and funds the provincial budget each year with a fixed share of the fund’s assets.

Rule-Based Resource Revenue Stabilization Funds: A Welfare Comparison

Resource prices, and petroleum prices in particular, are volatile and difficult to predict, so government revenue in resource-producing regions is also uncertain and volatile. Adjusting government expenditure in response to these revenue movements involves economic, social and political costs. Many jurisdictions have established rule-based revenue stabilization funds to address revenue volatility, but there is little evidence on whether these funds improve welfare or if some fund designs increase welfare more than others. Using Monte Carlo techniques, we provide a quantitative welfare comparison of several types of rule-based stabilization funds for a petroleum-producing jurisdiction. We find large potential gains from the use of a fund to stabilize revenue, but some fund types reduce welfare, particularly those that accumulate large stocks of assets or debt. A fund that performs well, and is generally robust to changes in the simulation parameters, has a fixed deposit rate out of resource revenue and a fixed withdrawal rate out of assets.

Government Revenue Stabilization Funds: Do They Make Us Better Off?

Les recettes que le gouvernement de l’Alberta tire de l’exploitation des ressources naturelles sont très instables, et l’ajustement des dépenses du gouvernement aux variations des revenus implique des coûts sociaux et économiques. Dans cet article, nous montrons, grâce à des simulations, que, si le gouvernement albertain avait créé au début des années 1970 un fonds de stabilisation fondé sur des règles, cela aurait permis de réduire l’instabilité et d’augmenter le bien-être. Tous les types de fonds ne permettent pas d’augmenter le bien-être. Le plus performant est celui où 50 % des recettes de l’exploitation des ressources naturelles sont déposées et dont 25 % des actifs sont retirés chaque année. Par contre, les fonds où sont accumulés de très grandes quantités d’actifs et ceux qui fondent les dépenses sur la simple moyenne mobile des recettes passées entraînent un bien-être inférieur.

Exchange rates and investment good prices: A cross-industry comparison

This paper presents estimates of the impact of exchange rate movements on the industry-level price of investment goods using a panel of OECD countries. An exchange rate depreciation (appreciation) causes a significant rise (fall) in the prices of the investment goods used by most industries, but the magnitude of this effect differs greatly across sectors. A currency depreciation causes a stronger increase in the price of investment goods used by industries that produce high-technology products and employ a larger proportion of imported capital. Hence, movements in the exchange rate may affect the level and distribution of investment across sectors.

Output effects of a tariff under flexible exchange rates

Abstract A tariffs impact on output is shown to depend on the asset market structure If foreigners do not hold the domestic asset, as is generally assumed in the previous literature, the tariff-induced current account surplus creates a large enough currency appreciation that demand for domestic output falls. When foreigners hold the domestic asset the current account surplus results in an international transfer of assets, which allows a smaller currency appreciation. The more similar are asset preferences across countries the smaller is the appreciation and, therefore, the greater is the likelihood that domestic output will increase.

Domestic taxation and international portfolio choice

Abstract Given uncertain domestic currency denominated tax payments, risk averse investors hold a portion of their wealth in a tax hedge portfolio, which empirical results show is comprised chiefly of the domestic bond. Tax hedging may, therefore, explain the observed preference for home country assets.