George S. Tavlas

The theory of monetary integration

Research dealing with the theory of monetary integration is reviewed. After briefly describing the genesis of the theory as foreshadowed in work on optimum currency areas, the paper assesses two main areas of recent research — the analysis of the effects of disturbances on participating countries in a currency area, and reputational considerations. With regard to disturbances, the paper finds that it is difficult to draw clear-out inferences from theoretical work on the optimal degree of exchange rate management and from empirical studies on the effects of shocks. Work on reputational issues is found to suffer from conceptual problems and has generated empirical results that have not supported the hypothesis that participation in a currency area is a sufficient condition to enhance reputation.

The impact of exchange-rate volatility on export growth: Some theoretical considerations and empirical results☆

Abstract This paper (i) examines the theoretical relationship between exchange-rate volatility and export growth and (ii) tests for the empirical impact of such volatility on real export growth of 11 OECD countries. We argue that, theoretically, exchange-rate volatility can have an impact on trade in either a positive or negative direction. Empirical results are provided for the managed-rate and flexible-rate periods. Both nominal and real measures of exchange rates are used in two specifications of volatility: absolute percentage changes and standard deviations. Of 33 regressions presented, only three support the hypothesis that exchange-rate volatility impedes export performance.

Exchange-rate variability and trade performance: Evidence for the big seven industrial countries

ZusammenfassungVariabilitÄt der Wechselkurse und Entwicklung der Exporte: Evidenz für die sieben gro\en Industriestaaten. — Dieser Aufsatz enthÄlt empirische Ergebnisse über den Zusammenhang zwischen der VariabilitÄt der Wechselkurse und dem Au\enhandel der sieben gro\en OECD-LÄnder. Im Gegensatz zu anderen Arbeiten wird der Einflu\ der realen Exporterlöse der ölförderlÄnder auf die Ausfuhr dieser sieben LÄnder berücksichtigt. Au\erdem wird das auslÄndische Einkommen sowohl bei “hohen” als auch bei “niedrigen” Dollar-Wechselkursen berechnet, um sicherzustellen, da\ die Ergebnisse nicht durch die Wahl eines bestimmten Wechselkursniveaus für den Dollar verzerrt werden. Schlie\lich werden au\er den unverzögerten auch die verzögerten Impulse der WechselkursvariabilitÄt für die Exporte getestet. Die Ergebnisse lassen darauf schlie\en, da\ die WechselkursvariabilitÄt die Exporte keines der sieben gro\en LÄnder wÄhrend der Periode flexibler Kurse nachteilig beeinflu\t hat.RésuméVariabilité des taux de change et performance commerciale: Evidence pour les grands sept pays industriels. - Cet article présente des résultats empiriques concernant la relation entre la variabilité des taux de change et le commerce pour les grands sept pays OCDE. Contrairement aux autres études empiriques les auteurs considèrent l’influence des revenus reéls d’exportation des nations producteurs de pétrole sur les exportations de ces sept pays. Aussi les auteurs mesurent le revenu étranger au niveau des taux de change de dollar «haut» aussi bien que «bas» pour garantir que les résultats ne sont pas biaises par le niveau particulier des taux de change choisi pour le dollar EU. Finalement, les auteurs testent les effets immédiats et retardés de la variabilité des taux de change sur les exportations. Les résultats indiquent que la variabilité des taux de change n’a pas négativement influencé les exportations des grands sept pays pendant la période des taux de change flexibles.ResumenVariabilidad del tipo de cambio y comercio internacional: Evidencia para los siete países industrializados más importantes. - En este trabajo se presentan resultados empíricos de la relación entre la variabilidad del tipo de cambio y el comercio para los siete países más importantes de la OECD. A diferencia de trabajos previos se toma en cuenta la influencia de los ingresos reaies en concepto de exportaciones de los países exportadores de petróleo sobre las exportaciones de los siete países estudiados. Además se mide el ingreso en divisas al cambio alto y bajo del dólar, con el fin de evitar el sesgo immanente al utilizar un sólo nivel de cambio para el dólar. Finalmente, so lleva a cabo un test para estudiar el efecto instantáneo y desfasado de la variabilidad del tipo de cambio sobre las exportaciones. Los resultados indican que la variabilidad del tipo de cambio no ha afectado negativamente a las exportaciones de los siete países estudiados durante el período de cambios flexibles.

Wage Rigidity and Monetary Union

We compare monetary union to flexible exchange rates in an asymmetric, three-country model with active monetary policy. Unlike Friedmans (1953) case for flexible rates, we find that countries with high degree of nominal wage rigidity are better off in a monetary union. Their benefits increase with the size of the union and the degree of wage rigidity of its members. Those with relatively more flexible wages fare better under a flexible rate regime. Their cost of participation in a monetary union increases with the unions level of wage rigidity as well as its tolerance of inflation variability. Taking into account actual asymmetries in the EU we find that the status quo (France and Germany in EMU, the UK pursuing a flexible rate) represents the best monetary arrangement for each of these countries. All three would likely be worse off if the UK joined EMU.

The Internationalization of Currencies : An Appraisal of the Japanese Yen

A tripolar international monetary system-centered on the U.S. dollar, the deutsche mark, and the yen - appears to be emerging. This paper not only assesses the role of the yen as an international currency but also presents a unified theory of international currency use and distinguishes between the roles of a nation as a world banker and as an international financial intermediary.

THE BENEFITS AND COSTS OF MONETARY UNION IN SOUTHERN AFRICA: A CRITICAL SURVEY OF THE LITERATURE

With the 14 members of the Southern African Development Community (SADC) having set the objective of adopting a common currency for the year 2018, an expanding empirical literature has emerged evaluating the benefits and costs of a common-currency area in Southern Africa. This paper reviews that literature, focusing on two categories of studies: (1) those that assume that a countrys characteristics are invariant to the adoption of a common currency and (2) those that assume that a monetary union alters an economys structure, resulting in trade creation and credibility gains. The literature reviewed suggests that a relatively small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprising all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g. fiscal balances) in the region, the potential losses (i.e. higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency. Copyright

Chicago, Harvard, and the Doctrinal Foundations of Monetary Economics

The relationship between Milton Friedmans monetary economics and the views espoused by Chicago and non-Chicago quantity theorists during the years 1930-36 is examined. Contrary to recent interpretations, Chicago economists advanced the efficacy of monetary policy as the means of escaping from the Great Depression, provided that such a policy was implemented by the use of budget deficits to generate monetary expansion. The use of the quantity theory of money to provide a theoretical rationale for budget deficits distinguished the Chicago economists from other quantity theorists and left them less susceptible to the Keynesian revolution. The claim that Harvard was an important center for monetary research in the early 1930s is refuted.

A Computational Approach to Finding Causal Economic Laws

This paper states four realities of econometric model buildingand shows that an econometric model can be causal only if theinterpretations given to its coefficients are consistent withthese realities. A numerically stable algorithm for estimatingsuch a model subject to equality and inequality constraints onthe model parameters is presented. This algorithm is designed insuch a way that it can be applied even when the matrix ofobservations on the models independent variables and thecovariance matrix of the models errors are deficient in rank.

Exchange Rate Variability and Direct Investment

This article investigates the relationship between exchange rate variability and direct investment. We distinguish between two kinds of exchange rate variations: short-term volatility and longer-term misalignment. Theoretical considerations indicate that the influences of both kinds of exchange rate variations on direct investment are ambiguous. We then review the empirical literature on this issue, which supports the theoretical findings. We conclude that, contrary to the arguments of proponents of managed exchange rate regimes, the increased variability of exchange rates under the managed floating system has not been harmful to direct investment.

The Global Implications of Regional Exchange Rate Regimes

We examine the implications of a regional, fixed exchange rate regime for global exchange rate volatility. The concept of the optimum currency area turns out to play an important role. The formation of a regional regime tends to decrease global volatility when countries are symmetric. The effects tend to be ambiguous in the case of asymmetries. The reduction in global volatility is larger when the rest of the world has more rigid labor markets than the peggers. When the exchange rate management is done mostly by countries with relatively more flexible labor markets. And in the presence of a negative correlation in productivity shocks across countries.