Proposals and IMF actions to reduce the frequency of crises

International Monetary Fund ; Financial crises ; Foreign exchange ; Transparency

A Framework for Monetary and Banking Analysis

The paper sets out and analyzes a simple model of money, banking, and price level determination. The model is first used to illustrate recent developments in the theory and analysis of banking, particularly the distinction between the portfolio management services provided by banks and their provision of transactions services. The assumptions are then extended to analyze price level determination in an economy that becomes an inside money economy as high-powered money goes out of use. The paper concludes by discussing the major unresolved questions about banking, money, and price level determination.

Privatization in East European Transformation

Privatization of state assets is an essential step to the creation of a viable private sector in the formerly socialist economies of Eastern Europe and the Soviet Union. A standard approach to the problem has rapidly emerged. Small firms are being privatized by sale very rapidly. The strategy then turns to larger industrial firms, which are to be corporatized as soon as possible, moved out of the shelter of the ministries that now in principle control them, and put under the direction of corporate boards; at the next stage the intention is to distribute shares, through sale or free transfer, to some combination of current workers in the firms, current management, mutual funds, holding companies, banks, insurance companies, pension funds, citizens, and the government. I analyze the standard approach and alternatives, as well as progress in implementing privatization, with emphasis on Poland, Hungary, and Czechoslovakia. Progress in privatizing small firms has been rapid in several East European countries, but privatization of large firms has been slow, with most success to date in Hungary.

Money, Interest and Prices

Twenty five years after the publication of the second edition, this paper describes and evaluates the Contributions to monetary and macroeconomics made in Don Patinkin's Money, Interest, and Prices (MIP). Its first accomplishment was to settle definitively many issues, such as the valid and invalid dichotomies between real and nominal magnitudes, Say's identity, the nature of the Keynesian system, and the requirements for the neutrality of money, which had been disputed for decades. It also opened the road to the future by developing macroeconomic models from a well specified microeconomic foundation. In so doing, it established the base on which subsequent equilibrium macroeconomics built. Beyond that, in Chapter XII, Patinkin pioneered the development of disequilibrium analysis by presenting a fully articulated model that makes the key distinction between notional and effective demands, and using it to explain price and quantity adjustments in conditions of unemployment.

Comments and Discussion (Symposium on Exchange Rates, Trade, and Capital Flows)

macroeconomics, exchange rates, trade, capital flows, target zones

Economic Reform in the USS and the Role of Aid

macroeconomics, USS, economic reform, aid

The Economy of Israel

The paper opens with a description of the salient features of the Israeli economy. These consist of a large government sector(the government budget has absorbed more than 80% of GNP in some recent years); high levels of defense spending; a large government budget deficit; a large current account deficit (about 20%of GNP); triple digit inflation; and extensive indexation of both wages and long term financial commitments. A descriptive model of the economy is then presented, which includes the particular asset menu of the Israeli economy, and its properties examined. Finally,the rrodel is used in analyzing aspects of the Israeli inflationary experience.The currency liberalization of 1977, which increased the access of Israelis to foreign assets, shares respensibility for the high rate of inflation. The possibilities of ending the inflation are discussed.

Seigniorage and Fixed Exchange Rates: An Optimal Inflation Tax Analysis

A country that decides to fix its exchange rate thereby gives up control over its own inflation rate and the determination of the revenue received from seigniorage. If the country goes further and uses a foreign money, it loses all seigniorage. This paper uses an optimal inflation tax approach to analyze the consequences for optimal rates of income taxation and welfare of the alternative exchange rate and monetary arrangements. From the viewpoint of seigniorage, a system in which the country is free to determine its own rates of inflation is optimal; fixed exchange rates are second best, and the use of a foreign money is worse. The paper notes that seigniorage is only one of the factors determining the choice of optimal exchange rate regime, but also points out that rates of seigniorage collection are high, typically accounting for five or more percent of government revenue.