A guide to international monetary economics exchange rate theories systems and policies

www.ebook3000.com A Guide to International Monetary Economics, Third Edition www.ebook3000.com A Guide to International Monetary Economics, Third Edition Exchange Rate Theories, Systems and Policies Hans Visser Professor of Money and Banking and International Economics, Vrije Universiteit, Amsterdam, The Netherlands Edward Elgar Cheltenham, UK Northampton, MA, USA â Hans Visser 2004 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Visser, H (Herschel), 1943– A guide to international monetary economics : exchange rate theories, systems and policies / Hans Visser.—3rd ed p cm Includes bibliographical references Foreign exchange Foreign exchange rates I Title HG3851.V57 2005 332.4'5—dc22 2004050644 ISBN 84376 595 Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall www.ebook3000.com Contents vii viii ix xii List of figures List of tables and boxes List of acronyms and symbols Foreword Introduction 1 Asset models 1.1 Introduction 1.2 Global monetarism 1.3 Monetary models 1.4 Portfolio models 1.5 Conclusion Appendix 1.1 Jensen’s inequality and Siegel’s paradox 5 27 37 38 IS/LM for an open economy 2.1 The basic model 2.2 Macroeconomic policy in a fixed-but-adjustable peg system 2.3 Macroeconomic policy with free-floating exchange rates 2.4 Portfolio analysis and international capital movements 2.5 Overshooting Appendix 2.1 Limitations and variants Appendix 2.2 Devaluation, the trade balance and the terms of trade 40 40 43 55 64 67 69 74 Dependent-economy models 3.1 The Australian two-sector model 3.2 The balance of payments in a fixed-peg system 3.3 Flexible exchange rates 3.4 Adding a third good 80 80 82 96 104 The long and very long periods 4.1 The long period 4.2 Purchasing power parity 107 107 115 v Visser 00 prelims v 15/10/04 10:23:25 am vi A guide to international monetary economics 4.3 The very long period 4.4 Conclusion 122 122 Exchange-rate policy 5.1 Introduction 5.2 Exchange-rate system and exchange-rate policy 5.3 Current-account disequilibria and capital-market integration 5.4 Policy coordination 5.5 Payments restrictions 5.6 Payments liberalisation 5.7 Conclusions 123 123 124 141 148 159 166 178 Monetary unions 6.1 What is a monetary union and what is the use of it? 6.2 Disadvantages of monetary union 6.3 Optimum currency areas 6.4 Potential problems of monetary union 6.5 European monetary union 6.6 Official dollarisation 6.7 Final observations Appendix 6.1 Monetary unions in history 180 180 183 189 196 199 212 214 215 References Index 221 251 Visser 00 prelims vi 15/10/04 10:23:26 am www.ebook3000.com Figures 1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 Overshooting Overshooting in the Frankel model The rate of exchange and the demand for foreign bonds Fiscal policy with LM steeper than EE Fiscal policy with EE steeper than LM Monetary policy with fully interest-elastic capital flows Monetary policy with IS between LM and EE Monetary policy with fully interest-elastic capital flows and free-floating exchange rates 2.6 Stock and flow effects 3.1 The equilibrium condition for the nontradeables market 3.2 The equilibrium condition for the tradeables market 3.3 Full equilibrium 3.4 The Salter diagram with a current-account deficit 3.5 The dependent-economy model with free-floating exchange rates 3.6 A demand shock for tradeables 3.7 A demand shock for nontradeables 3.8 A demand shock for tradeables with perfect capital mobility 3.9 A demand shock for nontradeables with perfect capital mobility 3.10 An increase in the rate of interest with perfect capital mobility 4.1 Portfolio adjustment and the rate of exchange 4.2 A higher propensity to spend on nontradeables in the dependent economy with fixed exchange rates 4.3 The dependent-economy model with free-floating exchange rates and capital inflows 5.1 Devaluation with overlapping bands 5.2 lntertemporal substitution with initial capital exports 5.3 Capital reallocation in a two-country world 5.4 Welfare effects of payments restrictions 20 23 31 46 47 49 50 59 67 84 85 86 95 98 99 100 102 102 103 110 113 114 136 143 145 160 vii Visser 00 prelims vii 15/10/04 10:23:26 am Tables and boxes TABLES 3.1 The differences between the IS/LM/EE model and the dependent-economy model 4.1 The hamburger standard 5.1 Countries with a currency board 5.2 Exchange-rate regimes, all countries, 1991 and 1999 5.3 Foreign-exchange market intervention and sterilisation by the central bank in the case of a surplus in international payments 5.4 Average black-market premium in 41 developing countries 6.1 Creation of base money through government borrowing from the central bank 6.2 Creation of base money through sales of assets to the central bank 6.3 Relative economic size and relative use of currencies: United States, Japan and euro area 6.4 Relative use of currencies: United States, Japan and euro area, 1998 and 2001 82 121 131 139 153 165 185 185 211 211 BOXES 1.1 Real interest rate parity 2.1 Base money creation 2.2 Effects of monetary and fiscal policies with fully interest-elastic capital flows 4.1 The consequences of higher investments by Japan in the European Union 5.1 Foreign-exchange speculation and the short rate of interest 15 42 60 111 151 viii Visser 00 prelims viii 15/10/04 10:23:26 am www.ebook3000.com Acronyms and symbols BIS CAC CIP ECB ESCB EEC ERM EMS EMU EU GDP GNP IMF LDCs LOP PPP REH RER SDRM SGP UIP URR e ex g gMs go i im k m md p Bank for International Settlements Collective Action Clauses Covered Interest Parity European Central Bank European Systems of Central Banks European Economic Community Exchange Rate Mechanism European Monetary System Economic and Monetary Union European Union Gross Domestic Product Gross National Product International Monetary Fund Less-Developed Countries Law of One Price Purchasing Power Parity Rational Expectations Hypothesis Real Exchange Rate Sovereign Debt Restructuring Mechanism Stability and Growth Pact Uncovered Interest Parity Unremunerated Reserve Requirement spot exchange rate export volume growth rate of national income or national product growth rate of the money supply real government expenditure rate of interest import volume ‘Cambridge’ k, or the ratio between cash balances and nominal income money multiplier real money demand probability ix Visser 00 prelims ix 15/10/04 10:23:26 am .. .A Guide to International Monetary Economics, Third Edition www.ebook3000.com A Guide to International Monetary Economics, Third Edition Exchange Rate Theories, Systems and Policies Hans Visser... free-floating exchange rates 3.6 A demand shock for tradeables 3.7 A demand shock for nontradeables 3.8 A demand shock for tradeables with perfect capital mobility 3.9 A demand shock for nontradeables... to the exchange rate elasticity of terms of trade with respect to exchange rate elasticity of trade balance with respect to exchange rate rate of inflation expected value values associated with