Sweder van Wijnbergen

Exchange rate management and stabilization policies in developing countries

Abstract We outline three channels via which a devaluation has a direct contractionaly impact on the aggregate supply side of the economy: local currency costs of intermediate imports, wage indexing in the presence of food imports and reduced volume of real credit to firms. Contractionary effects via the supply side are more damaging than Krugman-Taylor effects via aggregate demand since a cut in aggregate supply leads to upward pressure on inflation while a cut in aggregate demand tends to abate inflation. Upward pressure on inflation may over time threaten the increase in competitiveness a nominal devaluation also intends to achieve. We also discuss the implications of a substantial foreign debt. We demonstrate that a successful devaluation raises the real (in terms of domestic goods) debt service burden, causing a Krugman-Taylor like contractionary effect on aggregate demand. We then analyse the effects of a preannounced slowdown of the rate of depreciation. Our results of course do not imply that a devaluation should never be considered. They do suggest, however, that a devaluation is likely to be an ineffective tool for demand management since it may cut aggregate supply as much or more in the short run.

Stagflationary effects of monetary stabilization policies : a quantitative analysis of South Korea

This paper presents a macro-model of the Korean economy that focuses on short-run macro-economic adjustment and, more in particular, on the transmission channels of monetary policy between the financial and the real sector of the economy. In addition to the usual link between monetary policy and aggregate demand via investment, the link between monetary policy and the supply side of the economy via the financing of working capital with borrowed funds is incorporated. This link can potentially reverse the short-run impact of tight money on inflation and aggregate the impact on output. Both export prices and domestic prices show a significant sensitivity to cost of financing working capital. This credit-supply side link gives a stagflationary bias to restrictive credit policies. The empirical relevance of this phenomenon is strongly supported by the simulation results derived with the model. Structurally, section 2 of the paper focuses on the real sector part of the model; section 3 discusses the financial sector. In section 4 different monetary stabilization packages are simulated using the model presented in sections 2 and 3, and alternative policy measures are discussed; the simulation runs show strong short-run stagflationary effects of tight money policies.

Financial policy and speculative runs with a crawling peg: Argentina 1979-1981

In this paper we present a model of a balance-of-payments crisis and use it to examine the Argentine experiment with a crawling peg between December 1978 and February 1981. The approach taken allows us to examine the evolution of a crisis when the collapse is not a perfectly-foreseen event. The implementation of the model yields plausible values of the one-month ahead probabilities of a collapse of the crawling peg. The probabilities exhibit a sharp increase in the middle of 1980 and indicate a significant loss of credibility throughout the remainder of the year. The results suggest that viability of an exchange rate regime depends strongly on the domestic credit policy followed by the authorities. If this policy is not consistent with the exchange rate policy pursued by the authorities, confidence in the exchange rate policy is undermined.

Taxation of foreign multinationals: A sequential bargaining approach to tax holidays

Tax holidays for foreign multinational firms are tax concessions or straight subsidies granted for a limited period after entry. Such phenomena occur widely. We apply a sequential bargaining framework to a problem of ex post bilateral monopoly characterized by the presence of a host-country government and a foreign multinational firm. We show formally how a tax holiday can arise due to irreversible outlays and outside options.

The welfare effects of trade and capital market liberalization

Treatise on the welfare effects of trade and capital market liberalization. Consquenses of the capital account liberalization in the presence of trade restrictions; Specifies on the liberalization of trade in the presence of foreign borrowing constraints; Proves superiority of gradual liberalization of trade to an abrupt liberalization.

Export incentives, exchange rate policy and export growth in Turkey

The driving forces behind the Turkish export miracle, and in fact its very existence, have remained a matter of debate. The authors show there was a boom. As to contributing factor s, import growth in the Middle East in excess of import growth elsewher e made a negative contribution. On exports to non-oil countries, the authors show that earlier claims that their growth was an accounting artifact are incorrect. Moreover, the authors find that export subsidies were mostly shifted backwards into higher producer profits. The export boom was triggered by macroeconomic policies and trade reform that allowed a steady real depreciation of the Turkish lira. Copyright 1993 by MIT Press.

Trade reform, aggregate investment and capital flight: On credibility and the value of information

Abstract In this paper we demonstrate that uncertainty about future policy reversals coupled with irreversible investment confers an option value to foreign exchange and may lead to capital flight and a fall in aggregate investment after a trade reform. The analysis focuses on the value of information and the credibility of the policy reform. The conclusion points to a potential role for international institutions to prevent such problems.

Macroeconomic Aspects of the Effectiveness of Foreign Aid: On the Two-Gap Model, Home Goods Disequilibrium and Real Exchange Rate Misalignment

We construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes. Aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage-price rigidities in the classical regime but decreases them in the Keynesian unemployment regime. A link is made with the two-gap model, but we highlight the role of real exchange rate misalignment (failure to clear the NT goods market).

Tariffs, the Real Exchange Rate and the Terms of Trade: on Two Popular Propositions in International Economics

In this paper we investigate the relation between tariff changes, terms of trade changes and the equilibrium real exchange rate. For this purpose we use two models of a small open economy: (1) a three goods version of the Ricardo-Viner model; and (2) a three goods model with full intersectoral factor mobility. We show that, in general, it is not possible to know how the equilibrium real exchange rate will respond to these two disturbances. Moreover, we show that the traditional wisdom that establishes that a tariff hike will always result in a real appreciation, while a terms of trade worsening will generate an equilibrium real depreciation, is incorrect.

Can abatement resolve the conflict between economic growth and the environment

SummaryThis paper reexamines the link between pollution, abatement policies and economic growth. We develop a Lucas variety of endogenous growth model to formalize the effects of pollution and abatement on growth. Pollution is linked to the scale of production; it has a negative impact on productivity both in directly productive activities and in the learning process. This effect may be mitigated by abatement activities the efficiency of which can be enhanced by investing in abatement technology. We show that less (effective) pollution is associated with higher growth in the steadystate. Also the short term effects are examined, and finally, we discuss the optimal government policies with respect to abatement and taxation.This paper reexamines the link between pollution, abatement policies and economic growth. We develop a Lucas variety of endogenous growth model to formalize the effects of pollution and abatement on growth. Pollution is linked to the scale of production; it has a negative impact on productivity both in directly productive activities and in the learning process. This effect may be mitigated by abatement activities the efficiency of which can be enhanced by investing in abatement technology. We show that less (effective) pollution is associated with higher growth in the steadystate. Also the short term effects are examined, and finally, we discuss the optimal government policies with respect to abatement and taxation.