Fiscal Policies and the Dollar/Pound Exchange Rate: 1870-1984

This paper investigates the consequences of fiscal policies for the exchange rate. After developing a simple theory of how government financing policies should effect the exchange rate, we test it using data on the dollar/pound exchange rate. Previous analyses have concentrated mainly on the past-Bretton Woods flexible exchange rate system, thus ignoring potentially useful information contained In fixed exchange rate periods or in previous flexible exchange rate periods. This paper shows that it is theoretically proper and econometrically feasible to merge evidence from different nominal exchange rate systems. The gain of this procedure is that we can extend the sample period back to the 1870's. Our results suggest that permanent government expenditures are the only fiscal variables that significantly affected the dollar/pound nominal exchange rate. Budget deficits appear to be irrelevant in this respect.

Bank Runs in Open Economies and The International Transmission of Panics

In this paper, we extend the bank run literature to an open economy model. We show that a foreign banking system, by raising deposit rates in the presence of a domestic banking panic, may generate sufficient liquid resources to acquire assets sold by the domestic banking system at bargain prices. In this case, foreign depositors will benefit from the domestic panic. We also show that our simple model is able to generate the spreading of panics. Perhaps not surprisingly, the crucial element in determining the propagation of financial crises is the effect of interest rates on savings decisions.

Nominal Exchange Rate Regimes and the Real Exhange Rate, Evidence from the U.S. and Britain, 1885-1986

Two propositions are common in the international finance literature: (1) the real exchange rate is a random walk, (2) the real exchange rate time series properties essentially depend on the nominal exchange rate regime. The first proposition has been used in support of the claim that PPP cannot even be considered a long run relationship since deviations from it are permanent in nature. The second proposition has been used as evidence of price stickiness. Contrary to the first proposition, this paper presents evidence that the random walk behavior of the real exchange rate is just a characteristic of the post-WWII period, while in the prewar period we observe the presence of transitory fluctuations. Also, although real exchange rate volatility appears to be different between fixed and flexible exchange rate regimes, these differences are not as systematic and large as the postwar data suggest.

Anomalous Speculative Attacks on Fixed Exchange Rates Regimes Possible Resolutions of the "Gold Standard Paradox"

This paper analyzed Krugman's contention that there is a "gold standard paradox" in the speculative attack literature. The paradox occurs if when a country runs out of gold its currency appreciates or, equivalently, if a speculative attack happens only after the country would have run out of reserves in the absence of a speculative attack. We first show that this "gold standard paradox is a very general phenomenon", relevant for all price fixing or price stabilisation schemes, which does not require mean reverting processes for the fundamentals and which can be present in discrete time models as well as in continuous time models. Next we show that the explicit consideration of the presence ans role of international currency arbitrageurs is one way of eliminating the paradox. If a "natural collapse" appears to occur before a speculative collapse, arbitrageurs keep official reserves just above the critical threshold level until the speculative attack point is reached. When the speculative attack occurs, official reserves do not undergo any finite change. The increased non-arbitrage demand for the currency of the country that abandons the gold standard is met out of the accumulated currency holdings of private arbitrageurs