Flexible Exchange Rate and Excess Capital Mobility

macroeconomics, exchange rates, excess capital

Two Notes on Exchange Rate Rules and on the Real Value of External Debt

This report presents two unrelated, short papers on exchange rate rules and on the real value of the external debt. The paper on exchange rate policy uses the Taylor model of overlapping, long term wage contracts to ask whether accommodating or PPP oriented exchange rate policies tend to stabilize output. In earlier work I had shown that exchange rate indexing, while destabilizing prices enhances the stability of output. The result is qualified hereby showing that the exchange rate not only affects aggregate demand directly but operates also, through the cost of imported intermediates, on the price level. It is shown that unless monetary policy is sufficiently accommodating this latter effect may dominate with the consequence that increased exchange rate indexation reduces output stability .The paper on the real value of external debt poses the question how to integrate external debt holdings in the traditional framework used to evaluate the effects on real income of changes in world prices. It is shown that integrating debt service liabilities in a comprehensive income measure makes real disposable income equal to the value of output less the real value of real interest payments on the external debt. Furthermore, with the CPI being the appropriate deflator for foreign debt, a rise in export prices raises income in proportion to exports while a rise in import prices lowers real income in proportion to Imports. The proper accounting of debt in a comprehensive income framework, noting the intertemporal budget constraints, thus restores the conventional treatment of the income effects of price changes.

After Asia: new directions for the international financial system

Asia ; International finance ; Financial markets

Real Interest Rates, Home Goods, and Optimal External Borrowing

The paper investigates the optimal tire path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rates. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home gods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in interest rates.

ASSESSMENT OF SECOND PILLAR PROGRAMS AT THE REGIONAL LEVEL

The second pillar of the CAP is expected to play a key role for rural development – especially for less favoured areas. Conservation of biodiversity and the cultural landscape and the competitiveness of farmers are important objectives addressed by different measures. The importance of the second pillar has been heavily emphasised for all the different objectives. The aim of the present paper is to analyse the programs of the second pillar for the federal state of Hesse, Germany. To give an overview of the programs the design of the measures is illustrated in detail. The programs are assessed from a theoretical point of view. Furthermore, the programs are classified into three axes in regard to the main objectives. The findings are threefold. Firstly, the Hessian rural development plan is very diverse in terms of program design, objectives and co-financing. Secondly, the assessment of second pillar programs lacks a detailed analysis considering effects and costs and comparing alternative measures. Thirdly, in Hesse the largest emphasis by financial means is applied to environmental and land management issues, namely the agri-environmental program.Common Agricultural Policy, Second Pillar and Regional Policy Impact, Agricultural and Food Policy, Q18, Q19,