Ehsan U. Choudhri

Currency Substitution and the Demand for Money: Some Evidence for Canada

RECENTLY, THE POSSIBILITY THAT foreign and domestic currencies are substitutes has received considerable attention (see [1, 2, 3, 10, 19, 21]). Currency substitution has important implications for the working of flexible exchange rates. If the degree of currency substitution is high, small changes in the money supply would induce large changes in the exchange rate. Furthermore, currency substitution would transmit the effect of monetary disturbances from one country to another. Indeed, significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence. This paper examines the empirical importance of currency substitution in the framework of the demand function for money. If currency substitution is important, the expected change in the exchange rate should be a significant determinant of the demand for home currency. In section 2, we undertake such a test for the Canadian demand for money during the recent flexible exchange rate period. There is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate. Our own tests confirm these results for Canadian data since 1970.

The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression

ADVOCATES OF THE FLEXIBLE EXCHANGE RATE SYSTEM have often claimed that this financial system insulates an economy from foreign business cycle disturbances. This claim has been viewed lately with considerable skepticism. Many leading economists have argued that while flexible exchange rates enable a country to independently determine (the rate of growth of) its money supply, they will not prevent foreign disturbances from affecting the demand for real cash balances through channels such as capital flows, currency substitution, or the wageprice setting process. Domestic output and prices, thus, will not be much more independent of foreign output and prices under flexible exchange rates. l The theoretical arguments purporting that the insulation powers of the flexible exchange rate are limited have found empirical support in the recent experience in which output and price fluctuations have continued to be related among many coun-

Real Exchange Rates in Developing Countries: Are Balassa-Samuelson Effects Present?

There is surprisingly little empirical research on whether Balassa-Samuelson effects can explain the long-run behavior of real exchange rates in developing countries. This paper presents new evidence on this issue based on a panel-data sample of 16 developing countries. The paper finds that the traded-nontraded productivity differential is a significant determinant of the relative price of nontraded goods, and the relative price in turn exerts a significant effect on the real exchange rate. The terms of trade also influence the real exchange rate. These results provide strong verification of Balassa-Samuelson effects for developing countries

Pareto gains from trade, reconsidered: Compensating for jobs lost

Abstract This paper questions whether commodity taxation can ensure Pareto gains from trade liberalization in the presence of unemployment. To address this question, we extend the standard multi-consumer model of international trade to include efficiency-wage unemployment. Even if trade liberalization does not cause aggregate unemployment to rise, individual workers may lose jobs and would require compensation to maintain their pre-liberalization levels of welfare. This compensation would weaken the incentive to work efficiently and thus reduce the likelihood of Pareto gains. Our analysis in fact establishes that such gains from liberalization are infeasible under certain plausible conditions.

The factor content of international trade without factor-price equalization

Abstract Within the basic two-factor multi-commodity model of a two-country world, the present paper shows that international factor-price equalization is unnecessary for deriving the Heckscher-Ohlin theorem in its factor-content version, according to which the bundle of goods exported by the capital-abundant country will use more capital and less labour than the bundle exported from the labour-abundant country. The factor-content version remains valid when the model is generalized to include trade impediments, intermediate goods or additional countries, except perhaps if the first of these extensions is combined with either of the other two.

The Leontief Paradox, Continued

According to Leamer (1980), the Leontief Paradox is based on a simple conceptual misunderstanding. In a multifactor version of the Heckscher-Ohlin model, he argues that a capital-abundant country need not have its exports more capital intensive than its importsprovided that the countrys commodity trade embodies a net export of both labor and capital services, as was the case for the United States in Leontiefs (1954) data. For such a country, however, the model does imply that capital per worker be greater in net exports than in consumption. Leamer finds that this implication is indeed consistent with Leontiefs data. This note shows, however, that there is another feature of the trade data which is not so easily explained. The fact that the United States exported labor services is in itself paradoxical. As discussed below (Sec. II), the model which Leamer uses to explain the paradox implies that a country is a net exporter of labor services if and only if its aggregate expenditure per worker is less than that in the rest of the world. This implication is clearly inconsistent with the evidence reviewed below (in Sec. III), which shows that expenditure per worker was substantially greater in the United States than the rest of the world and yet the United States exported labor services. Therefore, a modified version of the Leontief Paradox continues to stand.

Some empirical support for the Heckscher- Ohlin model of production

This paper develops empirically feasible tests of the production side of the Heckscher-Ohlin model of international trade in the case where factor prices are not equal between countries. To allow for factor-price differences across industries within each country, three variants of the model are considered. Tests of these variants are implemented.for Canada and the United States. Results are favorable to all three variants, especially the variant that allows imperfect factor mobility within each country. Thus, the paper finds some support for the Heckscher-Ohlin model of production.

Gains from International Factor Movements without Lump-Sum Compensation: Taxation by Location versus Nationality

This paper questions the feasibility of Pareto-type gains from international factor movements, without lump-sum compensations, when taxes (subsidies) on factors and consumers located within the same country cannot discriminate on the basis of national origin. As the analysis shows, no incentive-compatible scheme of taxation based on location (versus nationality) is a feasible mechanism for ensuring that free factor mobility always raises every home nations welfare above the autarkic level. This result introduces a note of pessimism about the possibility of avoiding distributional problems associated with factor movements between countries.

Productivity Performance and International Competitiveness: An Old Test Reconsidered

A modern adaptation of the Ricardian model is used, which incorporates monopolistic competition and multiple factors to derive a MacDougall-type relation between a countrys international competitiveness at the industry level and its productivity performance. This relation is implemented empirically for Canada and the United States, using panel data for twenty-five years and forty industries. A key finding is that the Canadian-U.S. productivity ratio is an important determinant of relative shares of Canadian firms in both Canadian and U.S. markets. Trade liberalization between Canada and the United States also plays a significant role in influencing market shares.

International Trade in Manufactured Products: A Ricardo-Heckscher-Ohlin Explanation with Monopolistic Competition

A large data set on trade in manufactured products is used to evaluate the performance of a model that combines both the Ricardian and Heckscher-Ohlin effects and incorporates monopolistic competition. The paper estimates a relation implied by the model to explain relative sectoral exports of major countries to a number of important markets, using 1970-90 data for nine manufacturing sectors. The relation fits the data well and variables suggested by both traditional and new trade models play an important role in explaining relative exports.