Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data (Subsequently published in "Applied Financial Economics", 16, 127-134, 2006. )

We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.

Growth and Poverty Reduction Under Globalization: The Systematic Impact of Exchange Rate Misalignment

This paper asseses of the role of economic growth in achieving the first target of the Millennium Development Goals (MDGs). The analysis is composed of two parts. First, we address economic growth as the most effective instrument for achieving poverty reduction. In evaluating feasibility we extend the “exit-time” concept and we find that at least one half of all the targeted countries will not achieve the first target of the MDGs if they continue on their historical trajectory. Second, we focus on accelerating the rate of growth in the poorest countries of the world if the MDGs are to be achieved. In a standard reduced-form growth-regression model we introduce the exchange rate misalignment defined as the chronic deviation between the nominal exchange rate and the purchasing power parity rate. We confirm the negative relationship between misalignment and growth. Most importantly, the analysis proves misalignment originates in the currency substitution that takes place in developing countries that results in the systematic devaluation of their currencies. This finding highlights the importance of the proper combination of trade and exchange rate policies in fostering growth in developing countries.millennium development goals (MDGs); exchange rate misalignments; economic growth and feasibility of MDGs; openness of the economy and economic growth; currency substitution and exchange rate misalignment.

"Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data"

We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.

Population and Agricultural Development Models: The Promise of the Third Generation

The first and second generation economic demographic models concentrated on the consequences of population growth. These were judged negative in the former, or possibly having some positive Kuznetsian effects in the latter. The proposed third-generation model examines conjointly both consequences and determinants of population growth, and analyzes them at the level of the agricultural household. In such a model the effects of population growth on agricultural development cannot be determined a priori but become the subject of empirical investigation

A Subjective Equilibrium Approach to the Value of Children in the Agricultural Household

A Philippine sample of agricultural households is studied by I subjective equilibrium model which also accounts for the household's demographic structure. The model becomes a potent tool for integrating the economic and demographic behaviour of the household, since issues such as the value of children can be approached in a reality maximization framework and furthermore, such values call be causally rellted to the variance in measured fertility among different households (or Socioeconomic groups). For example, the low marginal productivity contribution of children in tenant (and small farm-size) households, along with the low fertility control that prevails there, has been combined In conforming the inverse fertility-endowments hypothesis, which in this instance is based on labour market failure in periods of peak agricultural labour demand. On the consumption side, on the other hand, the demand for leisure and for other commodities is consistent with the higher valuation of children, and thus higher fertility, in tenant (and small farm-size) households, as compared to owner (and large farm-size) households. The policy implications of such findings from a household equilibrium model are rich

The Euro and Its Benefits: Trade in Hard and in Soft Currencies

The introduction of the euro is a momentous event that has important implications for the world, for Europe, and also for the world. Protectionism in Europe in its various forms is being given a final blow with the introduction of the common currency that, for the first time, will lead to genuine convergence in prices. The abolition of the internal foreign exchange borders has profound effects for competitiveness and trade. It entails more freedom for Euroland’s producers to swim competitively – and especially to sink. What looks like a more self-sufficient (or ‘closed’) Euroland is in effect an open domestic market that has converted into domestic-currency transactions what previously constituted international trade involving foreign exchange. This conversion is uniquely beneficial for the partners that previously had the relatively softer currencies. Finally, the benefits to the EMU partners multiply and spill over to the global level as the euro becomes a strong, and potentially a parallel resere currency

On the Missing Link between Currency Substitution and Crises

Traditional approaches to the etiology of financial crises focus on the fundamentals of an economy, more specifically on the disequilibrium in the balance of payments. The purpose of this paper is to extend this ‘first generation’ literature of financial crises with a general model that focuses on the quality of a currency as a store of value for asset holding purposes – as opposed to the medium-of-exchange characteristics of a currency that enter considerations of the balance-of-payments approach. A formal model is sketched around a utility function that includes money as an asset held in both local currency and foreign exchange. Given a steady stream of money supply, asset-price considerations in a free currency market make a fixed exchange rate untenable for the local currency and lead to devaluation and to crisis. Impressionistic evidence from the recent experience of financial crises corroborates the hypothesis of currency substitution. The policy implications of the hypothesis parallel those f market incompleteness for asymmetric information, as cast within the framework of asymmetric reputation between the soft and hard currency that leads to currency substitution for asset-holding purposes

Financial Sector Liberalisation: Should the Poor Applaud?

Summary Increasingly micro?finance is being encouraged to reformulate its primary focus from explicit antipoverty work to concentrate instead on financial sustainability. Much of this approach is predicated on neoclassical theory which calls for liberalisation of financial markets. It is asserted that, apart from prudential supervision, liberalised markets would create an enabling environment for better financial servicing of the poor; and it is time that micro?finance programmes became financially self?sustaining, and therefore free of subsidies. Empirical testing of these views remains inconclusive, indicating the underlying fact that in many cases financial markets, even after liberalisation, have not behaved entirely as modelled. Though pro?poor interventions in financial markets often have been unsuccessful, they were motivated by valid concerns about the poor being under?served. The main contention of this article is that the current wisdom overestimates what liberalisation can achieve for greater market competition in serving the poor. This is because of its exaggerated faith in the role of interest rates in market clearance, and its inadequate account of informal financial service providers. Stronger, rather than reduced, focus on the poor and poorest, even if via subsidised micro?finance programmes, would help develop financial markets. As in other areas of economic reform, selfish motives of the market may require a helping hand to sustain poor?friendly innovations in service provision