Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium

Most of the literature on two-tier exchange markets is built around models in which domestic policy can exert a powerful influence on the spread between the current account exchange rate and the capital account exchange rate. We show that if optimizing agents are risk neutral, domestic policy has no significant influence on the spread. Our work with Belgian data suggests that a nsk neutral specification for Belgian residents acting in the two-tier market is hard to reject, and we also find evidence that domestic variables do not affect the Belgian spread.

The Transmission of Disturbances under Alternative Exchange-Rate Regimeswith Optimal Indexing

The paper develops a general stochastic macroeconomic model which can be used to study the international transmission of disturbances under alternative exchange-rate systems. Four types of exchange-rate systems are considered: uniform flexible exchange rates, uniform fixed exchange rates, two-tier exchange rates in which the current-account exchange rate is fixed and the capital-account exchange rate is flexible, and two-tier exchange rates with separate, floating rates for current and capital-account transactions. It is assumed that expectations are rational, so only the unexpected portion of macro policy alters the level of output. In addition, private contracts form the underpinning of the aggregate supply function, and they can be adjusted optimally in response to the country's choice of exchange-rate regime. It is shown that when the home country takes all prices as exogenous and wages are optimally indexed, the country is fully insulated from foreign disturbances under the two fixed-rate regimes but not under the two flexible-rate regimes. Even so, the fixed-rate regimes are inferior to the flexible-rate regimes in terms of their ability to minimize output variance. When the home country is large in the market for its own produced good, these results must be modified. The analysis makes two general points. First, one cannot assume stability of structure when assessing the consequences of alternative exchange-rate regimes. For example, the slope of the aggregate supply curve and the rationally-formed expectations in the asset markets can respond dramatically to the government's choice of exchange-rate regime. Second, exchange-rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare.

The Size and Timing of Devaluations in Capital-Controlled Developing Countries

A developing country often pegs its exchange rate to a single currency, such as the U.S. dollar, even though it faces a higher inflation rate than the country to which it is pegged. As a consequence, it experiences real exchange-rate misalignments and a series of easily-anticipated devaluations. While the chaotic capital market events surrounding anticipated devaluations are avoided through quantitative capital controls, the country is left with the classic devaluation problem: when should it devalue, and by how much? In this paper, we consider a policymaker who pegs the nominal exchange rate and adjusts the peg periodically so as to minimize a set of costs. The control problem is made difficult by the fact that the future times for devaluations are currently unknown stochastic variables. Characterizing the real exchange rate as regulated Brownian motion permits the cost minimization problem to be solved explicitly. The size and timing of devaluations are jointly determined outcomes of optimizing behavior. The framework yields insights into how changes in the stochastic environment affect both the size and timing of devaluation. These insights provide guidance about the determinants of devaluation episodes even when Brownian motion is not the relevant stochastic process for real exchange rates. Using cross-sectional data on 80 peg episodes from seventeen Latin American countries over the 1957-1990 period, we find empirical support for the model's main predictions.

Perspectives on the Recent Currency Crisis Literature

In the 1990s, currency crises in Europe, Mexico and Southeast Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve our understanding of these events, researchers have undertaken new theoretical and empirical work. In this paper, we provide some perspective on this work and relate it to earlier research in the area. Then we derive the optimal commitment to a fixed exchange rate and propose a common framework for analyzing currency crises that draws from both the early first-generation work and the more recent second-generation approach. The cross-generational framework stresses the important role of speculators and also recognizes that the government's commitment to a fixed exchange rate is constrained by other policy goals. In the final section we study the crisis prediction literature and find that some crises may be particularly difficult to predict using currently popular methods.

Marion Flood French Correspondence

Entries include letters, a photograph of French, an appeal for the bookmobile and notice of an autographed book for Santa to put under the tree . Date range: 195

Christine Weston Correspondence

Entries include the brief biographical information of an author from Brewer, Maine, born and raised in India, and living at times in a convent where she was sent during World War II, a typed biography of Weston, a typed letter on Salmon Pool Farm, Brewer, MAINE, stationery presenting Be Thou the Bride, and typed transcripts of letters that present her works of fiction set in India and Maine such as Indigo, The Devil\u27s Foot, The Dark Wood, and her book for younger people Bhimsa, The Dancing Bear, three newspaper clippings are presented together: an illustrated sketch of Weston with a caption, a book review, and an announcement on her receipt of a John Simon Guggenheim memorial award following the publication of her first book as well as an admiring book review of Weston\u27s 1970 novel The Hoopoe

Holding International Reserves in an Era of High Capital Mobility

Last September, as calls grew louder for European Central Bank (ECB)intervention to reverse the euro’s fall, the lead of an Economist article asked, “If central banks are so reluctant to intervene in foreign-exchange mar-kets, why do they still hold so many reserves? ” The article went on to say that at the time, the ECB and the euro area’s national central banks together held about $226 billion of foreign-exchange reserves, not counting their sizable gold holdings.1 The question is being asked more often these days. The Economist sug-gested that the idea of having an abundance of reserves is partly a carryover from the Bretton Woods system, when central banks were obligated to defend their parities against the dollar through intervention and so needed a lot of reserves. Yet, as the Economist noted, Bretton Woods broke down thirty years ago, and today many fewer countries peg their exchange rates. Indeed the cur-rency and financial crises of the 1990s have led some observers to conclude that in a world of high capital mobility, fixed exchange rates such as the Euro-pean exchange-rate mechanism or the East Asian pegs before 1997–98 cannot work for long.2 As a result, more countries have shifted to floating exchange rates. With less need to hold reserves to defend currency values, one would expect global reserve holdings to decline. But just the opposite has occurred— world reserve holdings are at record levels. Figure 1 shows that global reserve holdings (excluding gold) were equiv-alent to seventeen weeks of imports at the end of 1999, almost double what

Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies

We develop a modified understand better the 1994 Mexican peso crisis as well as aspects of the European currency crises in 1992-93. We introduce the assumption that the speculative attack is sterilized by the domestic monetary authority, we incorporate a stochastic risk premium, and we allow for some price stickiness. The modified model shows that macroeconomic policies inconsistent in the longer run with a fixed exchange rate can push the economy inevitably towards a currency crisis, but it also demonstrates how a government currently following consistent macroeconomic policies can suddenly face a speculative attack triggered by a large shift in speculative opinion. However, the ability of a sudden shift in speculative opinion to trigger an attack is bounded by the position of fundamentals. Thus an attack does not require a later change in policies to make it profitable.

Benthic Biofilm Controls on Fine Particle Dynamics in Streams

Este artículo contiene 15 páginas, 7 figuras, 3 tablas.Benthic (streambed) biofilms metabolize a substantial fraction of particulate organic matter and nutrient inputs to streams. These microbial communities comprise a significant proportion of overall biomass in headwater streams, and they present a primary control on the transformation and export of labile organic carbon. Biofilm growth has been linked to enhanced fine particle deposition and retention, a feedback that confers a distinct advantage for the acquisition and utilization of energy sources. We quantified the influence of biofilm structure on fine particle deposition and resuspension in experimental stream mesocosms. Biofilms were grown in identical 3 m recirculating flumes over periods of 18–47 days to obtain a range of biofilm characteristics. Fluorescent, 8 mm particles were introduced to each flume, and their concentrations in the water column were monitored over a 30 min period. We measured particle concentrations using a flow cytometer and mesoscale (10 mm to 1 cm) biofilm structure using optical coherence tomography. Particle deposition-resuspension dynamics were determined by fitting results to a stochastic mobile-immobile model, which showed that retention timescales for particles within the biofilm-covered streambeds followed a power-law residence time distribution. Particle retention times increased with biofilm areal coverage, biofilm roughness, and mean biofilm height. Our findings suggest that biofilm structural parameters are key predictors of particle retention in streams and rivers.This study was funded by a Marie Curie Intra- European Fellowship to WRH (FP7- PEOPLE-2011-IEF-302297) and an Austrian Science Fund grant to T.J.B. (START Y420-B17). K.R.R. was supported by a CUAHSI Pathfinder fellowship and U.S. NSF Graduate Research Fellowship. J.D.D. was supported by a Fulbright-Spain fellowship. The modeling effort was supported by U.S. NSF grants EAR- 1215898 and EAR-1344280 to AIP. Supporting data are provided at doi:10.6084/m9.figshare.4252193.Peer reviewe