H. Jager

Coordination of Speculation

Abstract We extend the models of Krugman [Journal of Money, Credit and Banking, 11 (1979) 311] and Flood and Garber [Journal of International Economics, 17 (1984) 1] on balance of payments crises to a multi-country setting such that coordination among speculators is important for a focal point to emerge. The moment of successful coordination when the currency is devalued is shown to depend on initial beliefs, the degree of imperfect communication, the rate of domestic credit creation, and the number of countries that have overvalued currencies. Contagion arises naturally in our framework. Subsequent speculative attacks occur faster and faster and communication among speculators results in fluctuating stocks of reserves prior to the attack.

Defending against Speculative Attacks

While virtually all modern models of exchange rate crises recognise that the decision to abandon an exchange rate peg depends on how harshly policy makers are willing to defend the regime, they virtually never model how the exchange rate is defended. In this paper we incorporate both the mechanics of speculation and a defence policy against speculation in the well-known currency crisis model of Morris and Shin (American Economic Review 88 (1998) 587-97). After adding these natural elements, our model outperforms standard currency crisis models at explaining stylised features of speculative attacks. Moreover, our model connects the theoretical currency crisis literature to an empirical literature on exchange market pressure, by bringing together its building blocks: exchange rate changes plus counter-acting defence policies. We use this connection to confirm our models predictions empirically.

Optimal exchange-rate policy in an open economy

SummaryBased on an empirical model constructed here and a quantified macroeconomic loss function, the analysis shows, by means of optimal control techniques, that a managed floating exchange rate would have been the optimal exchange arrangement for The Netherlands in the first half of the 1970s. Freely floating rates would have been the second-best solution. For both arrangements as well as for the adjustable peg the optimal time paths and various characteristics are deduced. Furthermore, quantification shows thatopenness does not exert the theoretically anticipated effect on a countrys need for fixed exchange rates.

The global monetaristic variant of the monetary approach to the balance of payments: an empirical study of the Netherlands

SummaryThe global monetaristic variant of the monetary approach in which the characteristic of the balance of payments being an essentially monetary phenomenon comes to the fore most strongly has been tested. Criticism of a theoretical nature regarding the monetary approach appears not to hold good for this variant. From the characteristics a reduced-form equation for the rate of growth of the stock of international monetary reserves has been derived. Moreover, simultaneous-equation systems have been developed to give substance to a possible mutual influencing of the variables in the money stock equation resulting from a sterilization policy. Estimations lead to a rejection of this variant for the Netherlands.

Model-Free Measurement of Exchange Market Pressure

If there is exchange market pressure (EMP), monetary authorities can use the interest rate and official interventions to offset this depreciation tendency, or they can let the exchange rate change. We introduce a new approach to derive how these three variables should be combined to measure EMP. This approach differs from existing methods, because it is model-free and requires only few assumptions. It implies that the interest rate should be taken in levels, not in the first-difference form typically used, and the level should be taken relative to the interest rate chosen if the country had no external economic objectives. This makes our measure more in line with economic sense. An illustration of EMP measures for the EMS crises in 1992-1993 shows that our adaptation also makes sense in practice.

exchange market pressure

Currencies can be under severe pressure in the foreign exchange market, but in a fixed (or managed) exchange rate regime that is not fully visible via the change in the exchange rate. Exchange market pressure (EMP) is a concept developed to nevertheless measure the pressure in such cases. This article describes EMP and its measurement.

The exchange-rate mechanism of the EMS and the ECU as a reserve asset: An impending incompatibility

Through an empirical investigation of the portfolio characteristics of the ECU by means of an amended mean-variance analysis, its attractiveness as a reserve asset is elucidated. The amendment is obtained after determining the empirical relevance of five optimal efficiency criteria developed by Hanoch and Levy. Application of the empirically relevant criterion produces the result that the ECUs reserve function will be substantially undermined by the exchange-rate stability that is pursued in the EMS.

Introduction to international economics

* Introduction * The World economy * Balance of payments * International trade theory * Production factors across borders * Direct investments and the international operating company * Trade policy, a welfare theoretical analysis * Protectionism: modern arguments * Trade policy and market structures: a micro-economic view point * Trade policy and competition: a macro-economic view-point * The practice of international trade * Protection and the business world * International financial streams * Valuta exchange issues * International risk: types and covering methods * International Finance * International Monetary Cooperation * International monetary system and economic development * Regional monetary integration

Comment on Manuel Guitián: The Role of Monetary Policy in IMF Programs

Guitian’s paper is an instructive analysis on the well-known theme of the implementation of monetary policy in IMF programs. It summarizes a decade-long tradition of theorizing concerning the choice of an instrument for both the implementation of monetary policy and the measurement of the monetary policy stance in a program country. With this goal in mind, the author extensively compares the nature of domestic credit expansion and money supply as performance criteria. His standpoint is that, in general, the former is preferable. In section 3 Guitian promises a re-examination of the issues involved in the light of significant changes in the framework within which monetary policy must be conducted. New challenges have arisen from domestic financial deregulation and the internationalization of financial markets, which have been fostered by international financial liberalization. Domestic deregulation has increased the degree of substitutability between banking liabilities and those of other financial intermediaries. Due to the internationalization of financial markets there is an increased substitutability of currencies. Nevertheless, the author concludes that these new challenges which now confront monetary policy-makers do not really affect the conventional arguments; they only add to the complexities of actual policy implementation. This position seems to have been built on an early statement (in section 2) that, if anything, the presence of capital flows strengthens the link between domestic credit, the balance of payments, and the international reserve position of the economy.

Exchange rate system simulation by means of vector processing

This paper presents optimal control simulations in order to evaluate the major types of exchange rate systems for a small open economy. This is done by using a macroeconometric model of the Dutch economy. The econometric models relevant for ex change rate policy evaluation contain a large number of equa tions. In applying optimal control techniques to such models, computational difficulties are encountered. However, these pro blems can be overcome if the algorithm of the control problem is reformulated to be effectively utilized on a computer with vec tor processing capabilities.