Jagdeep S. Bhandari

Economic Interdependence and Flexible Exchange Rates

In 1973, the world moved from fixed exchange rates, pegged to the gold standard or an agreed-upon currency, to the floating system of flexible exchange rates, constrained only by the occasional intervention of the central banks of various nations. The eighteen essays in this book explore what the shift has meant for world economic interdependence and seek to clarify what has become an extremely complex system. All but two are published here for the first time.Following Rudiger Dornbuschs Foreword, Jacob A. Frenkel reviews the history of flexible exchange rates. Remaining sections of the book take up exchange rate determination, the transmission of disturbances as exemplified by the oil crises of the 1970s, the policy implications of economic interdependence, and a selection of simulation studies based on models of various size and design.Contributors include Alan V. Deardorff, J. David Richardson, Jeffrey Sachs, Robert M. Stern, Pentti J. K. Kouri, William H. Branson, Willem H. Buiter; and Michael R. Darby, among other distinguished economists.Jagdeep Bhandari is affiliated with George Mason University, Bluford Putnam with the Economics Group of Chase Manhattan Bank, and Jay Levin with Wayne State University.

Exchange rate management under uncertainty

These twelve essays take up economic management under flexible exchange rates in the presence of uncertainty. Nearly all of the contributions adopt a rational expectations framework, focusing on the stochastic aspects of the assumption and exploring the variability of, for example, output and prices in relation to the variability of various external disturbances.Jagdeep Bhandari is Associate Professor of International Economics at West Virginia University.

Studies in international macroeconomics

One of the most important developments in macroeconomics during the last decade has been the introduction of the rational expectations approach. Before the introduction of this method, economists relied on a variety of ad hoc mechanisms which often led to errors in their predictions. Studies in International Macroeconomics explains the ways in which the rational expectations method deals with uncertainty. It presents stochastic models and applies them to curent issues such as exchange rate determination, the effects of the rise and fall in oil prices, and the impact of wage indexing on the economy.

Monetary Disturbances, Inventory Fluctations and the Level of Sales: A Theoretical and Empirical Analysis

There has in the past several years been a revival of interest in the topic of inventory fluctuation and its relationship to the short-run dynamics of output. One important reason for this interest can be traced to the pioneering work on aggregate supply begun by Lucas [11; 12] and extended among many others, by Barro [3; 4]. In their models, the behavior of output is driven by intertemporal considerations. It is a natural extension of such models, if output is storable, to consider the implication of producers whose current output can either be sold immediately or held in stock for future sales. Current sales, by the same token, may be either current production or goods from inventory. In a recent paper Blinder and Fischet [6] develop such a model. Using it they demonstrate that inventory dynamics can be an explanation for an empirical weakness of simple versions of the Lucas-type models real world business cycles are characterized by considerable persistence; simple equilibrium business cycle models do not exhibit such persistence, or in some cases it is present only through the ad hoc presence of a lagged output term in the aggregate supply function. Except for the influence of inventories, producers in the Blinder-Fischer analysis behave as do producers in most new classical macro models. They are price-takers and quantity-setters. In a model where inventories exert an influence on output decisions such neoclassical behavior cannot be ascribed to perfectly competitive conditions. If firms are perfect competitors, output decisions will not reflect the state of current inventories.

Indexation, Deficit Finance and the Inflationary Process

Two common perceptions regarding indexation are that it is inflationary and that because indexation reduces the redistributional (and other) costs of inflation, the willingness of the authorities to halt inflation is diluted in an indexed economy by comparison with one that is non-indexed. However, these propositions have received surprisingly little attention in the formal literature for any form of indexation other than wage indexation. If the only form of indexation present in an economy is wage indexation, then it is well-known from the familiar Fischer [4] and Gray [6] analysis, that wage indexation exacerbates the price level increasing effects of inflationary disturbances (subject to the qualifications noted by Barro [1] and Cukierman [3]), while the impact of the latter upon real output and employment depends upon the source of the disturbance. None of these papers however, consider the implications of any other form of indexation other than wage indexation. Thus, there is virtually no work on the interaction of alternative types of indexation with deficit finance, in determining the inflationary course of an economy, nor any discussion of how such indexation is likely to impinge upon the macroeconomic effects (such as those on the price level, the interest rate or on the government budget deficit) of underlying inflationary innovations in the economy. While several countries have formal wage indexation arrangements, as least five countries (Argentina, Brazil, France, Iceland and Israel) have had indexed government bonds. In addition, social security payments (government transfers) are indexed to the price level in most countries (including some that do not have wage indexation on any large scale, such as West Germany, Portugal, Spain and Sweden) and finally, some countries have also experimented with indexation of income tax collections (Argentina, Austria, Brazil, Canada,