Robert G. Murphy

Capital mobility and the relationship between saving and investment rates in OECD countries

Abstract This paper considers tests that use data on saving and investment rates to determine the degree of international capital mobility. Two types of evidence are presented to show that a high correlation between saving and investment rates across OECD countries can be consistent with a high degree of capital mobility. This evidence qualifies the conclusions of previous studies and casts doubt on the usefulness of testing hypotheses about capital mobility with data on saving and investment rates.

The relation between a university's football record and the size of its applicant pool

We show that the winning record of a universitys football team is positively (and statistically significant) related to the number of the applications for admittance received by that university. Our parameter estimates indicate that an increase in winning percentage from .500 to .750 tends to produce a 1.4% increase in applicants in the following year.

Productivity shocks, non-traded goods and optimal capital accumulation

This paper considers the interaction of saving and investment in determining the current account for a small open economy subjected to productivity shocks. By emphasizing the distinction between traded and non-traded goods, the analysis highlights the crucial role of the real exchange rate in macroeconomic adjustment. Our results demonstrate the importance of intertemporal substitution for determining the response of investment to anticipated productivity disturbances. We also show how the correlation of movements in saving and investment following an anticipated disturbance depends critically on relative sectoral factor intensities.

Managing the Dollar: Has the Plaza Agreement Mattered?

This paper considers whether the Plaza Agreement of September 1985 marked the beginning of a fundamental shift in the exchange-rate policy regime for the United States, the former West Germany, and Japan. The paper uses a simple monetary model of the open economy to illustrate how the exchange rate responses to news about the trade balance when the government authorities gear policy toward resolving external imbalances. The paper finds that U.S. dollars exchange rates against the Japanese yen and the West German mark respond strongly to news about the U.S. trade deficit during the period following the Plaza Agreement but not during the period preceding the Agreement. This evidence, evaluated in the context of the simple model, suggests that the Plaza Agreement marked a significant shift toward more active government management of exchange rates. Copyright 1991 by Ohio State University Press.

Stock Prices, Real Exchange Rates, and Optimal Capital Accumulation

The dynamics of the real exchange rate and the price of equity for a small open economy are analyzed using an optimizing model in which the process of capital accumulation entails adjustment costs. The analysis demonstrates how changes in fiscal policies or world interest rates can generate sustained movements in real exchange rates and equity prices simply because investment requires scarce resources. Interpreting such movements as evidence of market inefficiencies would be incorrect since adjustment is driven entirely by equilibrium in asset and goods markets. The results, however, do indicate that a stable and consistent set of fiscal policies can help reduce unnecessary volatility in real exchange rates and equity prices.

Interest rate parity and the exchange risk premium Evidence from panel data

This paper provides evidence that a time-varying risk premium is responsible for the rejection of the interest rate parity theory. We us a panel data set of returns on the Eurocurrency deposits and employ cross-section / time series methods to account for common movements in risk premia across deposits denominated in different currencies.

Asset market approaches to exchange rate determination: A comparative analysis

SummaryTo this point, we have focused on the assumptions needed to derive the various theoretical models from our illustrative model. All the models, whether monetary or portfolio balance in nature, tend to use similar speed of adjustment and specialization assumptions to simplify the analysis. For instance, both approaches have models that assume that goods markets adjust slowly relative to asset markets, so that goods prices are fixed in the short run (i.e., Henderson, Isard, Branson, Dornbusch, Frankel), and both approaches also have models that assume that goods markets clear in the short run via flexible prices (i.e., Kouri, Bilson, Frenkel). As we have seen, the crucial assumptions separating the monetary and portfolio balance approaches concern the degree of substitutability between domestic and foreign bonds: the monetary approach assumes perfect substitutability, while the portfolio balance approach assumes imperfect substitutability. These substitutability assumptions specify whether or not more than money market equilibrium is necessary for determining the short-run exchange rate. In Sections III and IV, we assess the validity of the various assumptions by empirically evaluating two models representative of the two approaches.ZusammenfassungVermögensansÄtze zur ErklÄrung der Wechselkurse: Eine vergleichende Analyse. — Diese Studie vergleicht die zwei wesentlichen Varianten des Vermögensansatzes zur ErklÄrung der Wechselkurse: den monetÄren Ansatz und den Ansatz des Portfoliogleichgewichts. Die verschiedenen Finanzmarktmodelle in der Literatur enthalten Annahmen über die Substituierbarkeit unter den Aktiva, die Anpassungsgeschwindigkeit der MÄrkte, die Spezialisierung bei finanziellen Transaktionen und die Grö\e eines Landes und haben daher vieles gemeinsam. Wenn auch viele Annahmen beider AnsÄtze gleich sind, so unterscheiden sie sich doch grundlegend in den Annahmen über die Substituierbarkeit von in- und auslÄndischen festverzinslichen Wertpapieren und die Rolle des Vermögens in den Nachfragefunktionen für Finanzanlagen. Aufgrund der empirischen Ergebnisse kann keinem der beiden AnsÄtze eindeutig der Vorzug gegeben werden. Die Simulationen weisen darauf hin, da\ der Ansatz des Portfoliogleichgewichts eine genauere Vorhersage des Niveaus und der VerÄnderungsrate des Wechselkurses erlaubt, doch lassen die Ergebnisse des Monte-Carlo-Modells erkennen, da\ die Unterschiede statistisch nicht signifikant sind.RésuméLa théorie des marchés d’actifs financiers à la détermination du taux de change: Une analyse comparative. — La présente étude compare les deux principales variantes de l’application de la théorie des marchés d’actifs financiers à la détermination du taux de change: l’approche monétaire et l’approche par l’équilibre du portefeuille. A partir d’hypothèses relatives aux possibilités de substitution entre actifs, à la rapidité de l’ajustement des marchés, à la spécialisation des transactions financières et aux dimensions de l’économie considérée, les divers modèles de marchés financiers présentés dans les ouvrages économiques procèdent tous du mÊme cadre d’analyse des taux de change. Si les deux approches ont en commun de nombreuses hypothèses, leurs différences portent avant tout sur les hypothèses relatives aux possibilités de substitution entre obligations intérieures et obligations étrangères et au rÔle de la richesse dans les fonctions de demande d’actifs. Les résultats empiriques obtenus par les auteurs ne confirment pas indiscutablement la validité de l’une ou de l’autre approche. Les simulations qu’ils ont effectuées montrent que l’approche par l’équilibre du portefeuille donne une prévision plus correcte du niveau et du rythme de variation du taux de change, mais les résultats obtenus au moyen de la méthode de Monte Carlo semblent indiquer que les différences entre les deux approches ne sont pas statistiquement significatives.ResumenDeterminatión del tipo de cambio basada en el studio del mercado de activos: Un análisis comparativo. — En este trabajo se comparan las dos principales variantes del método basado en el mercado de activos que se aplica para determinar el tipo de cambio: el método monetario y el método del saldo de cartera. Adoptando supuestos respecto a la posibilidad de sustitución, velocidad del ajuste, especialización y dimensiónen del país, todos los modelos de mercado financiero que figuran en la literatura se derivan de un marco comÚn para el análisis del tipo de cambio. Si bien muchos de los supuestos que se adoptan en los métodos monetario y del saldo de cartera son parecidos, las principales distinciones se refieren a los supuestos relativos a la posibilidad de sustitución entre los bonos internos y los bonos exteriores, así como al papel de la riqueza en las funciones de demanda de activos. Los resultados empíricos obtenidos no favorecen claramente a uno u otro método. Nuestras simulaciones indican que el método del saldo de cartera permite prever con mayor exactitud el nivel y la tasa de variación del tipo de cambio, pero nuestros resultados Monte Carlo parecen indicar que las diferencias no son significativas a efectos estadísticos.

Time series evidence on the saving-investment relationship

The long-run saving-investment correlation for the 24 OECD countries is re-examined using the Johansen procedure. It is found that saving and investment rates are not correlated in the long run for the majority of OECD countries. In the countries where cointegration is found, the Gonzalo-Granger common factor analysis suggests that saving is the driving force of the cointegrated system.

Explaining Inflation in the Aftermath of the Great Recession

This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I confirm previous findings that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that a Phillips curve modified to allow its slope to vary with uncertainty about regional economic conditions can best explain the recent path of inflation.

Import pricing and the trade balance in a popular model of exchange rate determination

Abstract This paper extends a popular model of exchange rate determination to include an import-pricing relationship that is consistenc with imperfect competition in the importable sector. The analysis highlights how import-pricing behavior and aggregate macroeconomic relationships interact in determining the dynamics of the exchange rate, the price of imports, and the trade balance. A basic prediction of the analysis is that an increase in the substitutability of imported product varieties in the domestic market will raise the responsiveness of the exchange rate and dampen the responsiveness of the trade account to monetary shocks.