Norman C. Miller

Monetary Policy and the Balance of Payments in Brazil and Chile

In this paper we examine the degree to which the balance of payments of two small, relatively open economies influences the ability of their monetary authorities to control the money supply. More specifically we investigate to what extent variations in the domestic component of the monetary base are offset vla international payments imbalances, and then to what extent the authorities sterilize the effects of payments imbalances on the monetary base. The method is Elrst to build a simple model that incorporates the monetary approach [12] to the balance of payments and contains an assumed central bank behavioral equation. Then this is tested with yearly data for Brazil and Chile. The approach attempts to take account of the simultaneity between (a) changes in the international and domestic components of the monetary base and (b) the level of income and the monetary base. This is done vla the use of reduced-form solutions and two-stageleast-squares regressions. The relevant literature has four parts. First, there is that body of literature surrounding the seminal work of Mundell [15], which concludes that a small highly open economy may have difficulty in controlling its money supply with Elxed exchange rates. Any monetary expansion will lead to a decline in the international component of the monetary base primarily via capital flows and the current account.

Exchange rate mean reversion from real shocks within an intertemporal equilibrium model

Abstract The post Bretton Woods era has been characterized by real exchange rates that exhibit mean reversion, with mixed evidence as to whether this reversion is partial (PPP never holds) or essentially complete. This paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account. A central feature of the model is the existence of non-traded goods. The model can generate partial or approximately complete mean reversion for the real exchange rate (depending on parameter values) if innovations in output are made up of permanent and temporary components. In addition, temporary output shocks generate a type of hysteresis wherein the short-run path for the exchange rate permanently alters its long-run equilibrium value.

A Monetary Approach to International Capital Flows Applied to the United States: A Note

The objective here is to test the well-known Kouri-Porter [6] monetary approach to aggregate capital flows, using U.S. quarterly data from 1961 through 1970.1 The reduced-form equation used in these tests differs from those in Kouri-Porter and other similar studies [ 1, 3, 4, 5, 8] in four ways . First, we include current and lagged (eight-quarter polynomial distributed lagged) values for the monetary variables in order to investigate the short-run and longer-term effects of monetary policy on net capital flows. Second, any reduced-form equation for the United States should not embody the small country assumption of previous work; thus, we use a measure of foreign base money rather than the foreign interest rate in the regressions. Third, the longer time frame requires that actual current income not be included in the reduced form, since the latter is likely to be a function (in part) of lagged values for the monetary variables. For this reason the empirical work utilizes Ty the eleven-year trend real GNP in the United States. A similar measure Ty* is used for foreign income. Finally, we estimate the U.S. balance of indebtedness rather than U.S. capital flows. The distributed lags for the monetary variables are motivated in part because of ideas contained in [2] and elsewhere, namely that a home monetary expansion will precipitate a capital outflow initially, and then a capital inflow later when nominal (or real) income and the demand for money nse in response to the monetary expansion. Similarly, we expect that a foreign monetary expansion may cause an immediate capital inflow and then a capital outflow for the United States. The rest of the world is taken to be the United Kingdom, Germany, Canada, and Japan. All foreign magnitudes are converted into dollar values at the prevailing exchange rates. For the monetary policy vanables we utilize the domestic assets of the United States and of foreign cental banks (D and D * ) adjusted for variations in the monetary expansion multipliers, k and k*, according to the formula

Exchange Rate Economics

The Uncovered Interest Parity (UIP) puzzle has remained a moot point since it first circulated economic discourse in 1984 and, despite a number of attempts at a solution, the UIP puzzle and other anomalies in Exchange Rate Economics continue to perplex economic thought in international finance. This fundamental book fill gaps in scholarly literature by amalgamating key discourse to generate synthesis models which appear consistent with the UIP puzzle and related anomalies, uniquely bringing them together in one place. Through a comprehensive and current review of the literature, Norman C. Miller reveals new explanations for exchange rate anomalies and offers an alternative approach towards the UIP puzzle, stimulating and guiding future research.

The Causes of and Gains from Intertemporal Trade

The authors show how the causes of and the gains from current account imbalances can be integrated into undergraduate economics courses using the same pedagogical tools that are used to explain comparative advantage and the gains from trade. A nonzero current account provides a mechanism for intertemporal trade, and a country has a comparative advantage in present (or future) goods if its autarky real interest rate is below (or above) the world real interest rate. The authors explain why the intertemporal approach to the current account reaches different conclusions from the traditional approach regarding welfare effects. Also, the authors integrate alternative approaches for explaining the underlying cause(s) of nonzero current account balances.

Short-Run Disequilibrium and Long-Run Deviations from Purchasing Power Parity

Persistent departures from purchasing power parity (PPP) since the demise of the Bretton Woods system have been well documented by many scholars, including Frenkel (1976) Kravis, Heston, and Summers (1982), and Kravis andLipsey (1983, 1987, 1988). Forexample, Kravis, Heston, and Summers found large departures from PPP for thirty-four countries in 1975, that is, some LDC price levels were about one-third the U.S. price level. In addition, Kravis and Lipsey found that most of the cross-country deviations from PPP can be explained by differences in per capita real GDPs. Wealthier countries tend to have relatively higher price levels, after adjusting for exchange rates. The literature on the disequilibrium approach to exchange rates as in Dombusch (1987), and Frenkel and Rodriguez (1982), can explain short-run exchange rate volatility and short-run deviations from PPP. However, these models generate a movement toward PPP in the long run, and, hence, are inconsistent with the stylized facts. Because of this, Lucas (1978) and Stockman (1982, 1987) have developed an equilibrium approach to exchange rates that allows for pennanent departures from PPP. However, the focus of the equilibrium approach has been on the long-run comparative statics solutions to open economy models, with little attention to exchange rate dynamics and the effect, if any, of such dynamics on the long-run equilibrium. A key element in the analysis below is the well-known idea that the equilibrium solution to a model will be altered if transactions take place when the system is temporarily out of equilibrium, provided that: (i)

Optimal Consumption When Consumption Takes Time.

A classic article by Gary Becker (1965) showed that when it takes time to consume, the first order conditions for optimal consumption require the marginal rate of substitution between any two goods to equal their relative full costs. These include the direct money price and the money value of the time needed to consume each good. This important conclusion has generally been ignored in textbooks. The present author calls attention to this topic by deriving Beckers conclusions within a simple two good framework. Then, he extends his work by showing that Beckers first order conditions are unlikely to be relevant if one drops Beckers strong assumption that time spent working (and, thus, money income) and time available for consuming are chosen endogenously by consumers.

Explaining Foreign Exchange Market Puzzles

The paper develops a flow model of the exchange rate with speculative capital flows integrated in a rigorous manner. The model is consistent with five foreign exchange market puzzles: (1) occasional discontinuous jumps in the exchange rate; (2) periodic short-term regimes of persistent appreciation/depreciation that can develop into a long swing; (3) the forward discount bias; (4) volatility clusters in the foreign exchange market that create conditional heteroskedasticity; and (5) the dual profitability of betting in the short run against any official foreign exchange intervention, and betting with the intervention in the long run.

Towards a loanable funds/amended-liquidity preference theory of the exchange rate and interest rate

Abstract The objective is to develop a unified theory of the exchange rate and interest rate, using a loanable funds/amended-liquidity preference approach, in order to provide a new perspective on many puzzling facts associated with the post Bretton Woods international economy. It is shown that: (i) a monetary expansion can initially raise the interest rate but depreciate the home currency; (ii) real demand shocks can cause interest rate and exchange rate overshooting; (iii) an infinite interest elasticity for capital flows cannot cause exchange rate overshooting if an ‘extended Marshall-Lerner’ condition holds; (iv) the home currency can appreciate when the current account is negative if the extended Marshall-Lerner condition is not satisfied; and (v) changes in the disequilibrium regime will cause instability in the estimates of reduced-form coefficients.

A Generalization of Hicksian Analysis

This paper is an attempt to incorporate certain well known ideas in macro theory into the Hicksian IS-LM framework. The primary purpose is not to discover any new truths but to systematize by working with IS-LM behavioral functions that bear some resemblance to those suggested by empirical studies on consumption, investment, the demand for, and supply of money. In particular, the independent variables will include wealth, the long and short rates of interest, permanent income, and transitory income. It is found that this allows a gen eralization of the Hicksian system in that, with one fixed set of behavioral assumptions, it is possible to change the system from a static model to a dynamic multiplier-accelerator type simply by varying the backward time horizon in volved in permanent income.