George M. von Furstenberg

From Worldwide Capital Mobility to International Financial Integration: A Review Essay

To be useful to economists, the definition of worldwide financial integration must refer to its welfare-relevant functions or consequences. What ultimately matters is its contribution to the equalization of current and intertemporal trading opportunities, represented by the cost of financial services, at maximum efficiency levels. Analyzing imperfect financial integration implies identifying the obstacles that prevent such equalization, with a lack of perfect capital mobility being only one of the possible impediments. Focusing on how to achieve international equalization, at least cost, of a broad range of financial services is a necessary change for a literature that has tended to rely on single stock, flow, or price correlations to gauge the degree of financial integration, without viewing it as a continuing microeconomic task with many facets.

A Case against U.S. Dollarization

gional currency consolidation inevitable. Faced with this prospect, advocacy of rapid dollarization, in some cases of this entire hemisphere, has spread beyond the United States. Business and government groups in countries from Argentina to El Salvador and Mexico have openly expressed interest in formal dollarization. While complete dollarization may indeed be a useful step for the period immediately ahead, I will argue that it is distinctly second-best in the short run and unsustainable in the long run even in this hemisphere. Specifically, uncooperative unilateral monetary unions, such as those brought about by formal dollarization, are inferior to the multilateral sharing model of monetary union pioneered in Europe.

Reducing real exchange rate variability and drift: Mexico on the way to North American monetary union?

Abstract This article seeks to identify the optimal type of currency and exchange arrangement for Mexico to the extent this can be done from a study of the past and prospective behavior of its real exchange rate with the U.S. dollar alone. Analyzing five distinct episodes from 1957 to 1992 and the transition crises between them, we first decisively reject the now fashionable view that the nature of the regime governing the nominal exchange rate is immaterial to the variability of the real rate. Rather, fixed or preannounced exchange-rate paths have a clear advantage in this regard over floating. Indeed, during one recent episode of fixing, the variability of the real exchange rate between Mexico and the United States was about as low as within the United States, between Chicago and Los Angeles. Nevertheless, within any fixed-rate regime, whether exchange rates are rigidly pegged or, as now, set on a sliding scale beforehand, there has been a recurring tendency for progressive real appreciation until the peg breaks. Within any such regime, real exchange-rate drifts thus appear to have been destabilizing. Monetary union and seignorage sharing with the United States and Canada, as the capstone of the North American Free Trade Agreement (NAFTA), may prove to be a superior arrangement although the desirability of monetary union for either Canada or the United States is not analyzed.

Growth and income distribution benefits of north american monetary union for Mexico

Abstract A monetary union joining highly developed and developing countries—if supported by far-reaching integration of financial systems and monetary control—can eliminate the national barriers to capital and technology transfers that are implied by “country risk.” The benefits of North American Monetary Union (NAMU) to Mexico thus may lie in faster growth and more efficient development and not only in any stability gains of the type discussed, for instance, in conjunction with European Monetary Union (EMU). Applying a series of consistent conjectures about the sources of change, by developing a long-term growth scenario for 1990 to 2025 with and without monetary union, the article finds that Mexicos economic size may rise from 4.4% of U.S. GDP in 1990 to 11.0% without and 12.2% with, monetary union by the year 2025. While this will still leave Mexico comparatively small, one-sixth of the growth of GDP over this period, in the United States and Mexico combined, will occur in Mexico.

Adjustment with IMF lending

Abstract Adjustment programs supported by the IMF are frequently criticized by creditor countries as involving conditions which are too lax or, once violated, too easily modified or pushed aside. At least as frequently, these same conditions are criticized by international debtors, or those adopting their interests, for being too harsh and rigid. Neither side has explained very well (1) how exactly the Fund impinges on the path of adjustment a country would choose unaided and what that path is, (2) why the Fund must be expected to accelerate adjustment to safeguard its objectives, and (3) what limits the Funds ability to do so. This paper attempts a theoretical deduction showing how this two-sided conflict arises from the Funds obligation to adjudicate benefits and costs in negotiating programs acceptable not only to its debtor, but also to its creditor countries.

Welfare Maximization: Samuelson's Analysis with Public and Private Goods

Samuelson (1955) and Bator (1957) have provided geometric techniques for deriving or illustrating the conditions for Pareto-optimality in exchange and production. Bators approach merely serves to illustrate what the distribution of private consumption and of consumer welfare must be if it is to make any arbitrarily chosen output combination Pareto-efficient. Samuelson. on the other hand, derives the Pareto-efficient output configuration, given a constraint on the welfare of one of two individuals. Even though Samuelsons approach makes the better use of the geometry, Bators demonstration was the first to be extended from private to public goods (by McLure, 1968). The reverse extension of Samuelsons model, from public to private goods, is attempted in this note.Samuelson (1955) and Bator (1957) have provided geometric techniques for deriving or illustrating the conditions for Pareto-optimality in exchange and production. Bators approach merely serves to illustrate what the distribution of private consumption and of consumer welfare must be if it is to make any arbitrarily chosen output combination Pareto-efficient. Samuelson. on the other hand, derives the Pareto-efficient output configuration, given a constraint on the welfare of one of two individuals. Even though Samuelsons approach makes the better use of the geometry, Bators demonstration was the first to be extended from private to public goods (by McLure, 1968). The reverse extension of Samuelsons model, from public to private goods, is attempted in this note.

Performance Measurement under Rational International Overpromising Regimes

Overpromising remains ingrained in international agreements, clouding their expected aggregate outcomes and how to assess the Parties’ performance. This paper provides a theory-based explanation and evaluation of this regime and its consequences, with an empirical application to the Kyoto Protocol. It shows (1) overpromising to be part of a sustainable strategy for electoral success, and (2) there are common determinants of the countries’ overpromising values that characterize the group regime. (3) Targets need to be adjusted for regression-predicted overpromising to yield rationally-expected outcomes. (4) Individual countries’ performance is best identified by deviations of outcomes from their adjusted, not the agreed, targets.

Price Stability: How Canada's Governor Crow Approached It

Abstract From 1976 to 1986, Canadas price level had more than doubled. Over the next 10 years, from 1986 to 1996, it rose only by a little over one-third. The appointment of Governor Crow to lead the Bank of Canada in 1987 and more principled devotion to the goal of price stability in a number of other advanced industrial countries contributed to the dramatic change in outcomes. This article seeks to discern and appreciate the structures of the model implicit in the Governors successful approach to achieving a lasting reduction of the rate of inflation to near zero.

The Political Temptations of Rationing by Insiders

Long waits for goods, services, and jobs to become available still exist in and to the east of Europe. This paper explores the political economy of what has made pervasive rationing an attractive way to cope with shocks in the past. The explanation advanced lies not in the creation of shortage rents for the personal profit of corrupt insiders controlling the production and distribution process. Instead, rationing with queuing is viewed as a “populist” scheme that allows a majority to keep its wages above levels that would clear the labor market while hiding the cost of such a policy, increased unemployment.

Introduction: Financial infrastructure development in the NAFTA countries

Abstract There are two basic ways of analyzing the contributions of banking and finance to economic development. One is positive and oriented toward growth. The other is negativor preventative: It is concerned with stability and the avoidance of major crises. The positive approach investigates how various indicators of financial deepening, and the building of financial intermediary structures and institutions correlate with improved efficiency and economic growth. The negative approach examines whether the financial system is adequately fortified against becoming either a major source or propagator of economic crises. The growth approach is well represented by the lead article by Blommestein and Spencer, but the emphasis in most others is on crisis prevention. Disturbances, both external nd internal to the financial sector, can go so far as to give rise to systemic risk, disrupting the chain of payments and settlements. These are the core functions of the banking and financial systems of the NAFTA countries whose development and risk characteristics are considered in this issue.