Creator: Kareken, John H. and Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 153 Abstract:
In this paper we consider a particular international economic policy regime: the laissez-faire regime, the distinguishing features of which are unrestricted portfolio choice and floating exchange rates. And as we show, that regime, although favored by many economists, is not economically feasible. It does not have a determinate equilibrium. That is an implication of an over-lapping-generations model. But as we argue in the paper, that is no reason for doubting the indeterminacy of the laissez-faire regime equilibrium.
Keyword: Overlapping generations, International economic policy, Foreign exchange rate, and Laissez-faire regime Subject (JEL): F31 - Foreign Exchange and D53 - General Equilibrium and Disequilibrium: Financial Markets
Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 018 Keyword: Capital movements, Foreign earning asset, and Foreign exchange rates Subject (JEL): E10 - General Aggregative Models: General, E62 - Fiscal Policy, E22 - Investment; Capital; Intangible Capital; Capacity, and F31 - Foreign Exchange
Creator: King, Robert G. (Robert Graham), Wallace, Neil, and Weber, Warren E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 307 Abstract:
This paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals. This is demonstrated in the context of a two currency, one good model, with three agent types and cash-in-advance constraints. A crucial feature is that the type i agents, for i=l, 2, must satisfy a cash—in-advance constraint by holding currency i, while type 3 agents can satisfy it by holding either currency. It is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist.
Keyword: Foreign exchange rates, Macroeconomics, and Currencies Subject (JEL): F31 - Foreign Exchange and E00 - Macroeconomics and Monetary Economics: General
Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 359 Abstract:
We show that some classes of sterilized interventions have no effect on equilibrium prices or quantities. The proof does not depend on complete markets, infinitely-lived agents, Ricardian equivalence, monetary neutrality, or the law of one price. Moreover, regressions of exchange rates or interest differentials on variables measuring the currency composition of the debt may contain no information, in our theoretical economy, about the effectiveness of such interventions. Another class of interventions requires simultaneous changes in monetary and fiscal policy; their effects depend, generally, on the influence of tax distortions, government spending, and money supplies on economic behavior. We suggest that in applying the portfolio balance approach to the study of intervention, lack 01 explicit modeling of these features is a serious flaw.
Keyword: Foreign exchange law and legislation and Debts, external Subject (JEL): F31 - Foreign Exchange, F41 - Open Economy Macroeconomics, and H30 - Fiscal Policies and Behavior of Economic Agents: General
Creator: Kiyotaki, Nobuhiro, Matsui, Akihiko, and Matsuyama, Kiminori Series: Monetary theory and financial intermediation Abstract:
Our goal is to provide a theoretical framework in which both positive and normative aspects of international currency can be addressed in a systematic way. To this end, we use the framework of random matching games and develop a two country model of the world economy, in which two national fiat currencies compete and may be circulated as media of exchange. There are multiple equilibria, which differ in the areas of circulation of the two currencies. In one equilibrium, the two national currencies are circulated only locally. In another, one of the national currencies is circulated as an international currency. There is also an equilibrium in which both currencies are accepted internationally. We also find an equilibrium in which the two currencies are directly exchanged. The existence conditions of these equilibria are characterized, using the relative country size and the degree of economic integration as the key parameters. In order to generate sharper predictions in the presence of multiple equilibria, we discuss an evolutionary approach to equilibrium selection, which is used to explain the evolution of the international currency as the two economies become more integrated. Some welfare implications are also discussed. For example, a country can improve its national welfare by letting its own currency circulated internationally, provided the domestic circulation is controlled for. When the total supply is fixed, however, a resulting currency shortage may reduce the national welfare.
Keyword: Money as a medium of exchange, Random matching games, Multiple currencies, Best response dynamics, and Evolution of international currency Subject (JEL): F31 - Foreign Exchange, D51 - Exchange and Production Economies, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, and C78 - Bargaining Theory; Matching Theory
Creator: Miller, Preston J. and Todd, Richard M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 481 Abstract:
This paper investigates the effects of changes in a country's monetary policies on its economy and the welfare of its citizens and those of other countries. Each country is populated by two-period lived overlapping agents who reside in either a home service sector or a world-traded good sector. Policy effects are transmitted through changes in the real interest rate, relative prices, and price levels. Welfare effects are sometimes dominated by relative price movements and can thus be opposite of those found in one-good models. Simulation of dynamic paths also reveals that welfare effects for some types of agents reverse between those born in immediate post-shock periods and those born later.
Keyword: Real interest rates, Relative prices, Prices, Exchange rates, and Monetary policy Subject (JEL): F31 - Foreign Exchange, E52 - Monetary Policy, and E31 - Price Level; Inflation; Deflation