International Economics II

10 The foreign exchange market.- 10.1 Introduction.- 10.2 The spot exchange market.- 10.3 The forward exchange market and swap transactions.- 10.3.1 Introduction.- 10.3.2 Various covering alternatives; forward premium and discount.- 10.3.3 Covered interest arbitrage.- 10.3.4 Swap transactions.- 10.4 The transactors in the foreign exchange market.- 10.4.1 A digression on speculation.- 10.4.2 Other transactors.- 10.5 The various exchange-rate regimes.- 10.5.1 The two extremes.- 10.5.2 The Bretton Woods system.- 10.5.3 Other limited-flexibility systems.- 10.5.4 The current nonsystem.- 10.6 Euro-dollars and Xeno-currencies: an introduction.- 10.7 International interest-rate parity conditions, and the foreign exchange market.- 10.7.1 Covered interest parity (CIP).- 10.7.2 Uncovered interest parity (UIP).- 10.7.3 Uncovered interest parity with risk premium.- 10.7.4 Real interest parity.- 10.7.5 Efficiency of the foreign exchange market.- 10.7.6 Perfect capital mobility, perfect asset substitutability, and interest parity conditions.- A.10.1 N-point arbitrage.- A.10.2 On the measure of the approximation error of the interest differential.- A.10.3 Marginal conditions and portfolio selection theory in speculative equilibrium.- A.10.3.1 Proof of the marginal conditions.- A.10.3.2 Marginal conditions and portfolio selection theory.- A.10.4 Expectations, interest, parity and market efficiency.- A.10.4.1 Rational expectations and market efficiency.- A.10.4.2 The Peso problem.- A.10.4.3 The Siegel paradox.- References.- 11 Balance of payments and national accounts.- 11.1 Balance-of-payments accounting and presentation.- 11.1.1 Introduction.- 11.1.2 Accounting principles.- 11.1.3 Standard components.- 11.1.3.I Current account.- 11.1.3.II Capital account.- 11.2 The meaning of “surplus”, “deficit”, and “equilibrium” in the balance of payments.- 11.3 The balance of payments and national accounts.- 11.4 The international adjustment process and open-economy macroeconomics: an overview.- A.11.1 The presentation of the US balance of payments.- A.11.2 Illegal transactions in the balance of payments.- References.- 12 The role of the exchange rate in the adjustment process in a partial equilibrium framework.- 12.1 Introduction.- 12.2 Critical elasticities and the so-called Marshall-Lerner condition.- 12.2.1 The balance of payments in domestic currency.- 12.2.2 The balance of payments in foreign currency.- 12.2.3 Partial vs total elasticities.- 12.2.4 A note on terminology.- 12.3 The equilibrium exchange rate; multiple equilibria and stability.- 12.3.1 Derivation of the demand and supply schedules; stability.- 12.3.2 Multiple equilibria.- 12.3.3 Monetary authorities’ intervention to peg the exchange rate.- 12.4 Interrelations between the spot and forward exchange rate.- 12.4.1 The various excess demand schedules.- 12.4.2 Forward market equilibrium and the spot rate.- 12.4.3 The monetary authorities’ intervention.- A.12.1 The critical elasticities condition.- A. 12.1.1 The simple case.- A.12.1.2 The general case.- A.12.1.3 Effects on the terms of trade.- A. 12.2 The stability of the foreign exchange market.- A. 12.3 A framework for the simultaneous determination of the spot and forward exchange rate.- References.- 13 The role of income changes in the adjustment process.- 13.1 Introduction.- 13.2 The multiplier without foreign repercussions and the balance of payments.- 13.2.1 The basic model.- 13.2.2 Balance-of-payments adjustment in the case of an exogenous increase in exports.- 13.2.3 Balance-of-payments adjustment in the case of an exogenous increase in imports.- 13.3 Foreign repercussions.- 13.3.1 A simplified two-country model.- 13.3.2 An alternative graphic representation and stability analysis.- 13.3.3 Multipliers and balance-of-payments adjustment.- 13.4 Intermediate goods and the multiplier.- 13.4.1 Introductory remarks.- 13.4.2 Different requirements of intermediate goods.- 13.4.3 Identical requirements of intermediate goods.- 13.4.4 Some empirical results.- A.13.1 The multiplier without foreign repercussions.- A.13.1.1 Basic results.- A.13.1.2 The balance of payments.- A.13.2 The multiplier with foreign repercussions.- A.13.2.1 The basic model.- A.13.2.2 Stability analysis.- A.13.2.3 The various multipliers: a comparison.- A.13.2.4 The balance of payments.- A.13.3 Foreign repercussions in a n-country model.- A.13.3.1 The general model.- A.13.3.2 Stability analysis.- A.13.3.3 Comparative statics. A comparison between the various multipliers.- A.13.3.4 The balance of payments.- A. 13.4 Concluding remarks. The empirical relevance of the foreign multiplier.- References.- 14 The absorption approach and interactions between exchange rate and income in the adjustment process.- 14.1 The absorption approach.- 14.2 Elasticities versus absorption: controversy and synthesis.- 14.3 A dynamic model of interaction between exchange rate and income in the adjustment process.- 14.3.1 The basic model.- 14.3.2 A graphic representation.- 14.3.3 Stability and comparative statics.- 14.3.4 The J-curve.- A.14.1 Alexander’s synthesis.- A.14.2 A simplified version of the Laursen and Metzler model.- A.14.2.1 The RR and BB schedules.- A.14.2.2 The dynamics of the system.- A.14.2.3 Comparative statics.- A.14.3 The J-curve.- A.14.4 The original two-country version of the Laursen and Metzler model.- A.14.4.1 The basic model.- A.14.4.2 Stability.- A.14.4.3 Comparative statics.- References.- 15 Money and other assets in the adjustment process under fixed exchange rates.- 15.1 Introduction.- 15.2 The classical (Humean) price-specie-flow mechanism.- 15.2.1 Introductory remarks.- 15.2.2 A simple model of the classical theory.- 15.2.3 Concluding remarks.- 15.3 The monetary approach to the balance of payments.- 15.3.1 The basic propositions and implications.- 15.3.2 A simple model.- 15.3.3 Concluding remarks.- 15.4 Macroeconomic equilibrium in a standard Keynesian-type open model.- 15.4.1 Introductory remarks: The Mundell-Fleming model.- 15.4.2 Graphic representation of the equilibrium conditions.- 15.4.3 Simultaneous real, monetary and external equilibrium; stability.- 15.4.3.1 Observations and qualifications.- 15.4.4 Comparative statics.- 15.5 Monetary and fiscal policy for external and internal balance. The assignment problem. The coordination problem.- 15.5.1 Introductory remarks.- 15.5.2 Internal and external balance and the assignment problem.- 15.5.2.1 Observations and qualifications.- 15.5.3 The policy coordination problem across countries.- 15.6 Portfolio equilibrium in an open economy.- 15.6.1 Introduction.- 15.6.2 Asset stock adjustment in a partial equilibrium framework.- 15.6.3 Portfolio equilibrium and macroeconomic equilibrium.- 15.6.3.1 Introductory remarks.- 15.6.3.2 A simple model.- 15.6.3.3 Momentary and long-run equilibrium.- A.15.1 A formal interpretation of the classical theory.- A.15.2 The monetary approach to the balance of payments.- A.15.2.1 A simple model.- A.15.2.2 A two-country model.- A.15.2.3 The effects of a devaluation.- A.15.3 Macroeconomic equilibrium in a standard Keynesian-type open model.- A.15.3.1 The slopes of the various schedules.- A.15.3.2 The study of dynamic stability.- A.15.3.3 Comparative statics.- A.15.4 Monetary and fiscal policy and internal and external balance.- A.15.4.1 The static model.- A.15.4.2 The assignment problem.- A.15.5 The problem of coordination.- A.15.5.1 The basic model.- A.15.5.2 International coordination compared to simple pairing.- A.15.5.3 International coordination compared to internal coordination.- A.15.6 Portfolio equilibrium in an open economy.- A.15.6.1 The case of partial equilibrium.- A.15.6.2 Portfolio and macroeconomic equilibrium.- A.15.6.2.1 The dynamics of the long-run equilibrium.- A.15.6.2.2 The stability conditions.- References.- 16 Money and other assets in the adjustment process under flexible exchange rates.- 16.1 Introduction.- 16.2 The critical elasticities condition is neither necessary nor sufficient.- 16.2.1 The basic model.- 16.2.2 Non-necessity and non-sufficiency of the critical elasticities condition.- 16.3 Monetary and fiscal policy for internal and external balance in the standard Keynesian macroeconomic model, and the choice of instruments.- 16.3.1 Perfect capital mobility.- 16.3.2 The normal case.- 16.4 The alleged insulating power of flexible exchange rates and the international propagation of disturbances.- 16.4.1 The alleged insulating power.- 16.4.2 The propagation of disturbances in a simple model.- 16.4.3 The propagation of disturbances in a two-country model.- 16.5 The new Cambridge school of economic policy.- 16.5.1 Introductory remarks.- 16.5.2 The basic model.- 16.5.3 Observations and qualifications; other versions.- 16.6 Portfolio and macroeconomic equilibrium in an open economy.- 16.6.1 Introductory remarks.- 16.6.2 The basic model.- 16.6.3 Static expectations.- 16.6.4 Rational expectations and overshooting.- A.16.1 The critical elasticities condition is neither necessary nor sufficient.- A.16.2 On the choice of policy instruments.- A.16.2.1 Fiscal policy.- A.16.2.2 Monetary policy.- A.16.3 On the alleged insulating power of flexible exchange rates and the propagation of disturbances.- A.16.3.1 The one-country model.- A.16.3.2 The two-country model.- A.16.4 The new Cambridge school.- A.16.4.1 The basic model.- A.16.4.2 An extension.- A.16.5 Portfolio and macroeconomic equilibrium.- A.16.5.1 The basic model.- A.16.5.2 Static expectations.- A.16.5.2.1 Short-run equilibrium.- A.16.5.2.2 Long-run equilibrium.- A.16.5.3 Rational expectations.- A.16.6 Forward market intervention.- References.- 17 International capital movements and other problems.- 17.1 Introduction.- 17.2 Short-term capital movements and foreign-exchange speculation.- 17.2.1 The main types of short-term capital movements.- 17.2.2 Flexible exchange rates and speculation.- 17.3 Long-term capital movements.- 17.4 The transfer problem.- 17.4.1 Introductory remarks.- 17.4.2 The traditional setting.- 17.4.3 Observations and qualifications.- 17.5 Exports, growth, and the balance of payments.- 17.5.1 Export-led growth.- 17.5.2 Growth and the balance of payments.- A.17.1 Speculation.- A.17.2 The transfer problem.- A.17.3 Exports, growth, and the balance of payments.- References.- 18 The exchange rate.- 18.1 Introduction.- 18.2 The traditional arguments.- 18.3 The experience of the managed float.- 18.3.1 Introduction.- 18.3.2 New light on an old debate?.- 18.4 The vicious circle of depreciation-inflation.- 18.4.1 Introductory remarks.- 18.4.2 The depreciation-inflation circle.- 18.4.3 Is the circle really vicious?.- 18.5 Exchange-rate determination: theory.- 18.5.1 The purchasing-power-parity theory.- 18.5.2 The traditional flow approach.- 18.5.3 The modern approach: money and assets in the determination of the exchange rate.- 18.5.3.1 Introductory remarks.- 18.5.3.2 The monetary approach.- 18.5.3.3 The portfolio approach.- 18.5.3.4 Interaction between current and capital accounts.- 18.5.4 The exchange rate in macroeconometric models.- 18.6 Exchange-rate determination: empirical studies.- 18.6.1 Introduction.- 18.6.2 The reactions to Meese and Rogoff, and the way out.- 18.6.3 An economy-wide model beats the random walk.- A.18.1 A disequilibrium model of real and financial accumulation in an open economy.- A.18.2 The modern approach to exchange-rate determination.- A.18.2.1 The monetary approach.- A.18.2.2 The portfolio approach.- A.18.2.3 Empirical studies.- A.18.2.4 Currency substitution.- References.- 19 The theory of monetary integration and the European Monetary System.- 19.1 Introduction.- 19.2 The theory of optimum currency areas.- 19.2.1 The traditional approach.- 19.2.2 The cost-benefit approach.- 19.2.3 The common monetary unit and the basket-currency.- 19.3 The common monetary policy prerequisite.- 19.4 The single-currency problem.- 19.5 The European Monetary System.- 19.5.1 Introduction.- 19.5.2 The ECU.- 19.5.3 The indicator of divergence.- 19.5.4 Monetary cooperation within the EMS.- 19.5.5 The EMS and the theory of optimum currency areas.- 19.6 Towards the European Monetary Union?.- 19.6.1 The Maastricht treaty and the gradual approach to monetary union.- 19.6.2 The institutional aspects.- 19.6.3 Conclusion.- A.19.1 Fiscal policy in a monetary union.- A.19.2 Some properties of basket-currencies in general and of the indicator of divergence in particular.- A.19.2.1 The basket-currency.- A.19.2.1.1 The sum of the weights.- A.19.2.1.2 Solution for the quantities.- A.19.2.1.3 Other properties.- A.19.2.2 The indicator of divergence.- A.19.2.3 The asymmetry in the bilateral margins.- References.- 20 Problems of the international monetary system.- 20.1 Key events in the postwar international monetary system.- 20.1.1 Introductory remarks.- 20.1.2 Convertibility.- 20.1.3 Euro-dollars.- 20.1.4 Special Drawing Rights.- 20.1.5 Collapse of Bretton Woods.- 20.1.6 Petrodollars.- 20.1.7 Demonetization of gold.- 20.1.8 The EMS.- 20.1.9 The international debt crisis.- 20.2 International liquidity and the demand for international reserves.- 20.2.1 Introductory remarks.- 20.2.2 The descriptive approach.- 20.2.3 The optimizing approach.- 20.2.4 The problem of the composition of international reserves.- 20.3 The traditional analysis of Euro-markets.- 20.3.1 General remarks and the simple multipliers.- 20.3.2 More sophisticated multipliers.- 20.4 The portfolio approach to Euro-markets.- 20.5 An evaluation of the costs and benefits of Xeno-markets.- 20.6 International capital flows and foreign exchange crises.- 20.6.1 Introduction.- 20.6.2 The basic case.- 20.6.3 Exchange rate expectations and the credibility problem.- 20.6.4 TheTobin tax.- 20.7 International policy coordination.- 20.7.1 Policy optimization, game theory, and international coordination.- 20.7.2 The problem of the reference model and the obstacles to coordination.- 20.8 Proposals for the international management of exchange rates.- 20.8.1 Introduction.- 20.8.2 McKinnon’s global monetary objective.- 20.8.3 John Williamson’s target zones.- A.20.1 The optimum level of international reserves and the theory of economic policy.- A.20.1.1 The cost-benefit approach.- A.20.1.2 The maximization of a welfare function.- A.20.1.3 Intertemporal maximization and the normative theory of economic policy.- A.20.2 The composition of international reserves.- A.20.3 A portfolio model of the euro-market.- A.20.4 Capital liberalization and foreign exchange crises.- A.20.4.1 Introduction.- A.20.4.2 The actual specification.- A.20.4.3 The method of analysis.- A.20.5 The policy coordination problem.- A.20.6 Target zones.- References.- 21 The problem of integration between the pure theory of international trade and international monetary economics.- 21.1 Introduction.- 21.2 An epistemological problem.- References.- Name Index.