Russell S. Boyer

Currency substitution under finance constraints

The perfect-foresight continuous-time couterpart of Lucas and stokeys cash-in-advance model is generalized to the case of two currencies. The money demand function for eac currency has as arguments the endowments of goods associated with each denomination. Various monetary shocks are investigated including permanent and temporary changes in levels and growth rates. It is shown that substitution can be an important factor in explaining: the possible negative transmission of inflation, the amount of volatility of exchange rates, and the degree tp which exchange rate movements approximate a random walk.

Commodity Markets and Bond Markets in a Small, Fixed-Exchange-Rate Economy

Commodity markets and bond markets in a small, fixed-exchange-rate economy. This paper opens up Metzlers macro-model for the small-country, fixedexchange-rate case by explicitly disaggregating between traded and non-traded goods and between domestic bonds and foreign bonds. The distinction between stocks and flows carries over to that between the stock capital account (the level of reserves) and the flow capital and trade accounts (the balance of payments). Fiscal policy in non-traded goods causes an increase in reserves and has an ambiguous influence on the trade account. Monetary policy in domestic bonds worsens the trade account and has an ambiguous effect on the level of reserves.

Financial Policies in an Open Economy

The large number of countries now pursuing flexible rates justifies another look at the small-country case under such an exchange rate regime. The Metzlerian (1951) macro-model, which was opened up to world trade by Mundell (1961b), provides an elegant framework for the analysis. That model remains the workhorse for much of the research on both fixed and flexible exchange rates for economies that have capital and commodity mobility with the rest of the world (McKinnon and Oates, 1966; Johnson, 1969; Frenkel, 1971; Dornbusch, 1973; Mussa, 1974; Parkin, 1974; Boyer, 1975). Recent research in related areas, in particular the disaggregation of commodities into traded and non-traded goods, permits a number of simplifications of that basic framework without restricting its generality. These simplifications allow greater attention to be paid to some aspects of the model that have been criticized in the past, notably the specification of the capital account (Willett and Forte, 1969). To meet these criticisms the model presented here has a portfolio balance conception of the asset markets. Within such a context it is possible to consider an element that has been neglected in the analysis of flexible exchange rates: the effects of the capital gains or losses from a change in the exchange rate. These capital gains, which assumed great importance recently because of large foreign currency borrowing, depend crucially upon the currency composition of domestic portfolios immediately before any exogenous shock. With the incorporation of capital gains into the portfolio balance model, the equilibrium is none the less uniquely dependent upon the values of the system parameters so long as the economy is not a substantial debtor in foreign currency-denominated market instruments (Tower, 1972). However, the popular assumption that the money market equilibrium condition is independent of the exchange rate is justified only when the economys net holdings of foreign currency market instruments is zero. Section II analyses the effects of financial policies under flexible exchange rates. A simple diagrammatic apparatus is developed there in order to portray these results. Section III introduces the fixed exchange rate version of the model and shows how this exchange rate regime can be incorporated into the diagram used above. Financial policies under this exchange rate regime are considered in Section IV, where a comparison is made of their potency under alternative exchange rate regimes. Section V provides a conclusion. The conclusions of this analysis can be stated very briefly. The traditional results concerning the relative potency of financial policies in non-traded goods and traded bonds under alternative exchange rate regimes (Fleming, 1962; Mundell, 1963) continue to hold. In particular, it is demonstrated that the conclusion that fiscal policy has no effect on the price level under flexible exchange rates depends on the economys having a zero net position in

Forward Premia and Risk Premia in a Simple Model of Exchange Rate Determination

This paper develops the standard rational expectations model of exchange rate determination with risk premia taken as exogenous. The exchange rate is equal to a weighted sum of all future values of the fundamentals and risk premia. Specifically, if risk premia are percei ved to be temporary, then their levels are negatively associated with rates of appreciation. This finding is consistent in sign with the results from the conventional regression equation, but the theory indicates that to obtain unbiased estimates, errors-in-variables techniques must be employed. Plausible estimates for the money market parameters are found from Canadian data. Copyright 1988 by Ohio State University Press.

Sterilization and the monetary approach to balance of payments analysis

Abstract The authorities can sterilize the balance of payments in both the short and long run if domestic capital markets are not fully integrated with those of the rest of the world. The degree of sterilization which the authorities employ is an important determinant of the economys response to any outside changes.

Efficiency and a simple model of exchange-rate determination

Abstract A monetary model has no intrinsic dynamics so the intertemporal behavior of exchange rates, spot and forward, depend entirely upon the time processes of the exogenous variables. For typical values of interest elasticities of money demand, only if all shocks are permanent do exchange rates follow random walks. Recently, changes in relative outputs and money supplies in the Canadian–US context have evidenced serial correlation so that shocks are not exclusively permanent ones. None the less, exchange rates have followed a random walk. This suggests that the monetary model is an inappropriate specification and that models which pay attention to the choice of currency of denomination deserve greater attention.

Johnson’s Conversion from Keynesianism at Chicago

“Johnson’s Conversion from Keynesianism at Chicago,” Russell S. Boyer, September 12, 2010 Johnson arrived at Chicago in 1959 identifying himself as a Keynesian, but during his period there he began to speak in derogatory terms about Keynes and about Keynesians. This paper analyzes the role that Friedman and Mundell played in this conversion. Our argument is that Johnson moved towards “the monetarist position,” but he denied that this was due to Friedman’s influence. Mundell’s thinking followed a similar path, both in his economics and in his assertion of independence from their distinguished colleague. The effect of these claims is to hide the fact that Friedman’s impact on their work was much greater than has generally been recognized.