Robert P. Flood

Collapsing exchange-rate regimes : Some linear examples

Abstract We construct a pair of linear examples to study the collapse time of a fixed exchange-rate regime. The first example is a perfect-foresight, continuous-time model which allows calculation of the exact collapse time and the tracking of reserves. The second example is a discrete time, stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate.

Fixing Exchange Rates: A Virtual Quest for Fundamentals

Fixed exchange rates are less volatile than floating rates. But the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes. This suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful. It also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability.

Market Fundamentals versus Price-Level Bubbles: The First Tests

When current market price depends partly on the expected rate of market price change, it is possible that the market will launch itself onto a price bubble with price being driven by arbitrary, self-fulfilling elements in expectations. The purpose of this paper is to provide some tests of the proposition that bubbles were absent during the German hyperinflation, a proposition we are unable to reject. The test methodology that we propose is general enough to be applied to other historical or contemporary episodes.

The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing

The paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange-rate systems: uniform flexible exchange rates, uniform fixed exchange rates, and two versions of two-tier exchange rates. The analysis makes two general points. First, one cannot assume stability of structure when assessing the consequences of alternative exchange-rate regimes. For example, the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the governments choice of exchange-rate regime. Second, exchange-rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare.

Monetary Policy Strategies

The merits of rules and discretion for monetary policy are considered when the structure of the macroeconomic model and the probability distributions of disturbances are not well defined. When it is costly to delay policy reactions to seldom-experienced shocks until formal algorithmic learning has been accomplished, and when time-consistency problems are significant, a mixed strategy that combines a simple verifiable rule with discretion is attractive. The paper also discusses mechanisms for mitigating credibility problems and emphasizes that arguments against some types of simple rules lose their force under a mixed strategy.

Uncovered Interest Parity in Crisis

This paper tests for uncovered interest parity (UIP) using daily data for 23 developing and developed countries during the crisis-strewn 1990s. We find that UIP works better on average in the 1990s than in previous eras in the sense that the slope coefficient from a regression of exchange rate changes on interest differentials yields a positive coefficient (which is sometimes insignificantly different from unity). UIP works systematically worse for fixed and flexible exchange rate countries than for crisis countries, but we find no significant differences between rich and poor countries.

Speculative Attacks and Models of Balance-of-Payments Crises

Recent developments in the theoretical and empirical analysis of balance of payments crises are reviewed. A simple analytical model highlighting the process leading to such crises is first developed. The basic framework is then extended to deal with a variety of issues, including alternative postcollapse regimes, uncertainty, real sector effects, external borrowing and capital controls, imperfect asset substitutability, sticky prices, and endogenous policy switches. Empirical evidence on the collapse of exchange rate regimes is also examined, and the major implications of the analysis for macroeconomic policy are discussed.

UNDERSTANDING EXCHANGE RATE VOLATILITY WITHOUT THE CONTRIVANCE OF MACROECONOMICS

Exchange rate regimes differ primarily by the activity of the exchange rate, not observable macroeconomic ‘fundamentals’. Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchange rates at low frequencies or when inflation is high. A basic task of international finance is explaining these cross-regime differences in exchange rate volatility. The evidence suggests that a switch in exchange rate policy is accompanied by a change in market structure; macroeconomic considerations are superfluous. We formalize this observation in a non-linear model with multiple equilibria.

Uncovered Interest Parity in Crisis: The Interest Rate Defense in the 1990s

A microwave oscillator using a transit-time transistor structure with a space charge zone, is provided. The negative resistance introduced by the transit-time in the space charge zone is utilized in a circuit connected with emitter and collector, the base being direct-biased and not passing the high frequency. To avoid a short-circuiting by the parasitic base-collector capacitance, a transmission line is connected in parallel across the base and collector terminals. The input impedance of this line is adjusted by short-circuiting this line at a distance close to a quarter of wavelength, thus creating an input inductance able to compensate the effect of the base-collector capacitance.

Multi-country tests for price level bubbles

Abstract Flood and Garber (1980) have examined data from the German hyperinflation to test for a price level bubble. In this paper, we extend this research to other episodes of hyperinflation. By testing for a simultaneous bubble across countries, we implement the conceptual experiment proposed by Flood and Garber to derive asymptotic distributions for the test statistics.