Macroeconomic Regime Research Articles

Exchange Rate Policy in Brazil

The macroeconomic regime implanted in Brazil during the second administration of Fernando Henrique Cardoso, and largely maintained by his successor, is typical of those of the advanced countries. The anchor is provided by an inflationtargeting regime (with a target inflation rate somewhat greater than in most advanced countries, of 4.5 percent a year, with a band around it of +/–2 percent). The exchange rate floats. The float is often described as free, but given the extent of recent reserve accumulation it would not qualify as a free float as understood by most economists. Fiscal policy has actually been more ambitious under the Lula regime, resulting for a time in a primary surplus of at least 4.25 percent of GDP (subsequently reduced to allow for a higher rate of public investment, and also temporarily reduced further to help combat the crisis). Monetary policy has then been directed at achieving the inflation target given fiscal policy, which— given history—has implied maintaining high interest rates. While the majority of the framework in Brazil is acceptable, it is a bit too laissez-faire in that the exchange rate should be targeted at a rate consistent with macroeconomic balance, which the authorities should treat as a reference rate.

Welfare regimes and macroeconomic regime constellations: explaining the Scandinavian anomaly

Since the early 1990s, the Scandinavian countries have recovered from one of the most severe crises of any Organisation for Economic Cooperation and Development (OECD) country ever, returning to a 'high road' growth path and also succeeding in terms of macroeconomic stabilisation indicators. To explain the causes for this coincidence of macroeconomic growth and stability, we propose a theory of macroeconomic resilience. We merge different theoretical strands into a joint approach of Macroeconomic Regime Constellations (MERCs) and Welfare Regime Constellations (WERCs). In the econometric part of our inquiry, we estimate Structural Vector Autoregressions (SVARs) to analyse the existence and consistency of MERCs in Sweden, Finland and Denmark.

The competitive real exchange-rate regime, inflation and monetary policy

This article argues that in a stable and competitive real exchangerate(SCRER); macroeconomic regime, the exchange-rate component candrive up inflation through the very mechanisms that stimulate high rates ofgross domestic product and employment growth; to offset this pressure,fiscal and monetary policies will have to be used to control aggregatedemand. It finds that in an exchange-rate regime of this type, monetarypolicy has a degree of autonomy that can be exploited to apply activemonetary policies. It analyses the degree to which monetary policy canbe used to control aggregate demand and concludes that it cannot bearthe main responsibility for this, which means that fiscal policy ought to bethe main instrument for controlling aggregate demand.

Are Analysts Right? Macroeconomic Factors and Regime Switching in the Term Structure of Interest Rates

The validity of analysts' beliefs that the dependence of bond prices on crude oil prices changes sign over time and that the overall economy performance is correlated with the slope of the yield curve is examined. These beliefs are mapped into the term structure of interest rates framework by allowing for regime switching in the term structure and by using crude oil prices and an overall economy performance index (CFNAI) as factors. Fitting is done using Gibbs sampling, which allows for fewer assumptions on the regime switching parameters than classical methods and, thus, provides a more flexible model. The predicted yields are calculated using the eigenfunction expansion method.

Five years of competitive and stable real exchange rate in Argentina, 2002–2007

We argue that the macroeconomic regime focused on the preservation of a stable and competitive real exchange rate (SCRER) has been a key factor explaining the rapid growth experienced in Argentina during 2002–2007. This policy promoted economic growth not only by preserving external and fiscal accounts sustainability, but also by providing incentives to the tradable sector and thus encouraging the expansion of its production, employment and investment. Monetary and exchange rate policies aimed at preserving a SCRER collide with conventional wisdom, particularly with the open economy trilemma. We argue that the critiques based on the trilemma may fail to hold in situations of excess supply of foreign currency and analyze the conditions under which the SCRER policy is sustainable.

Macroeconomic regime switches and speculative attacks

This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogenous and changes over time together with the state of the economy. The regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate. The model predicts that currency composition of public debt affects dynamics of macroeconomic variables. Furthermore, the model is consistent with evidence from recent currency crises, in particular small seigniorage revenues.

Effective Exchange Rates in Britain, 1920–1930

During the 1920s Britain's rate of economic growth lagged behind that of many other countries in the world economy. Much of the historical literature has attempted to explain this outcome in terms of the macroeconomic policy regime resulting from the return to a fixed exchange rate at the prewar gold standard parity in 1925.' Despite some agreement on the magnitude of overvaluation in 1925 and a consensus that the overvaluation was greater in 1920, the absence of consistent data has resulted in the co-existence of a number of views that are clearly contradictory. For example, David Greasley and Les Oxley argue that the sterling real exchange rate became overvalued mainly during World War I.2 Nicholas Dimsdale reports that the real effective exchange rate appreciated significantly over the period 1921-1925, whilst B. P. A. Andrews finds a real effective exchange rate peak in 1920, followed by a cycle of depreciation until 1922 and appreciation over 1922-1925.3 absence of agreed data means that we cannot seriously evaluate how the exchange rate overvaluation affected aspects of the British economy during the 1920s. main study of Britain's real effective exchange rate during the 1920s is John Redmond's The Sterling Overvaluation in 1925: A Multilateral Approach, which evaluates the degree of overvaluation in 1925 relative to 1913 from a purchasing power parity perspective. There are four main problems with Redmond's study that we wish to address here. First, Redmond uses a variety of weights (derived from trade data for 1925, 1928, and 1929) and finds that the effective exchange rate indices are not sensitive to the weights used. However, the volatility of exchange rates and prices during the transwar period means that the choice of weights does matter over that period. To deal with this we work with trade weights from 1920 and 1925.4 Secondly, Redmond used arithmetic averaging to derive the effective exchange rate index. In light of modern conventional practice, we work with geometric averaging.5 Thirdly, Redmond used consumer and wholesale price indices constructed by the League of Nations during the interwar period. There are some major discrepancies between the

Growth, competitiveness and employment in Peru, 1990-2003

The growth of high-quality employment needed to reduce the share of informal occupation and open unemployment in Peru will require an acceleration and diversification of private investment in the tradable sector. One of the main constraints faced is the uncompetitiveness of the non-extractive tradable sector. In 1990-2003. competitiveness improved in this sector essentially as a result of lower labour costs, a socially unjust and economically ineffective route to follow. To raise competitiveness, it is essential for the macroeconomic regime to include a competitive real exchange rate (to which there are obstacles) and higher productivity at the microeconomic level. This latter goal needs to be pursued through microeconomic and mesoeconomic policies, the main obstacle being the narrow outlook prevailing from the mid 1990s onward, which emphasized the reduction of average labour costs as the main way to raise competitiveness.

Continuity and Change: Some Observations on the Landscape of Agricultural Labourers in North Bihar, India

This paper is an attempt to catalogue and analyse the changes over two decades in the world of agricultural labourers in a backward region in India. It is primarily based on a series of field visits to two villages in Purnia district, located in the north‐eastern part of Bihar. Changes in the living conditions of labourers are obviously connected to developments in the rural economy of the region and there are important linkages with developments elsewhere, including changes in the overall macro‐economic policy regime. An attempt is made to trace these. Agricultural wage workers in the surveyed region are extremely poor by any reckoning, although a few of them have made some progress through state‐sponsored programmes and migration. These developments have also contributed significantly to altering the relations of dominance and subordination, thus creating greater elbow‐room for labourers. However, it is important not to overstate these small gains and there are serious doubts as to whether they can be sustained. It appears that some of the material correlates of labourers’ well‐being in the surveyed region are being affected adversely by the currently ascendant neoliberal policy regime. There are no signs of the emergence of mechanisms that might imply sustained significant improvements in the very fragile life and work conditions of these labourers.

Income distribution in Argentina, 1974-2000

Over the last quarter-century, the distribution of income in Argentina has deteriorated steadily. This article utilizes microsimulation analysis to decompose the impact that labour changes have had on the distribution of family income. In the 1970s, the deterioration was due to real reduction and relative dispersion of wages; in the 1980s, it was linked to growing unemployment resulting from successive crises; in the 1990s, under the new economic order, the deterioration continued as a result of the unemployment generated by the restructuring of production and the increase in labour force participation, coupled, in the last phase, with greater inequality in wage levels. The article concludes that the new economic model involves, beyond currency appreciation and the ultimate collapse of the macroeconomic regime, a lower employment elasticity of growth –thereby generating more structural unemployment– and a larger wage gap between workers at different skill levels.

Efficiency And Equity Aspects Of The

The joint impact of long term structural features, on the one hand, and of recent market-oriented reforms in the macroeconomic incentive regime, on the other, are inducing major changes in social and production organization throughout the Latin American region. The new economic model is quite different in structure and performance from the one Latin American countries exhibited during the Import Substitution Industrialization (ISI) period. Non tradable activities such as telecommunications, energy or transport services, natural resource processing industries producing low value added industrial ‘commodities’ and assembly industries (‘maquiladoras’), producing computers, TV and Video sets and garments for the US market, together with the vehicle industry, which has managed to receive preferential treatment from the part of the various governments in the region, have performed much better than average, both in terms of labor productivity growth as well as in terms of ‘catching up’ with the international productivity frontier. Contrary to the above, unskilled labor, and engineering and knowledge intensive industries, have performed worse than average and are ‘falling behind’ international standards. Domestic subsidiaries of multinational corporations and large local conglomerates are gaining ground within GDP, while SMEs and public enterprises have been losing it. The paper examines some of the macro-to- micro relations underlying the above mentioned process of structural transformation and the interdependency between economic, technological and institutional forces inducing it. It argues that ‘main stream’ economics fails adequately to capture the role played by such interdependencies and offers a policy advice which can not deal with the new efficiency and equity problems resulting from recent structural changes.

Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime

Did macroconomic interventions make any contribution to Argentina's revovery from the Great Depression? Macroeconomic policy deviated from gold-standard orthodoxy after the final suspension of convertibility in 1929. Fiscal policy was conservative. Monetary policy became unorthodox after 1931, when the Caja de conversión began rediscounting to sterilize gold outflows and avoid deflation. This change predated the creation of the central bank in 1935. A wider literature links the interwar depression in the core to flaws in the gold standard, and active monetary policy to escape from defaltion and slump; our work extends this idea to the periphery.

Social regulation after Fordism:regulation theory, neo-liberalism and the global-local nexus

This paper uses the analytical tools of regulation theory to analyse critically claims about the emergence of post-Fordism. It is argued that prevailing notions of post-Fordism are inconsistent with the central tenets of regulatioist method, devaluing as they dothe critical importance of social regulation and the ways in which a putative post-Fordist economy may be macro-economically pieced together. Rather than representing the basis for a renewed period of sustained growth, flexibility and its corollary, neo-liberalism, are argued to represent the politics and economics of sustained capitalist crisis. Only when the systemic instability at the global level can be regulated can we expect a durable replacement for Fordism. This requires not only a new macro-economic regime but, crucially, a new ‘institutional fix’.

Converting military capacity to civilian use: A two-sector model of an economy in transition

The paper presents an analytical two-sector macroeconomic model of the type employed for the former Soviet Union. Partial liberalization turns a repressed inflation disequilibrium macroeconomic regime into an open inflation regime; one which continues to be characterized by disequilibrium, due to excess demand. Inflation proceeds in the two sectors, fuelled by real wage resistance and excess demand. A macroeconomic role is given to the conversion of the military production complex to civilian use. Thereafter, the effects of devaluation as well as increased consumer goods and technological aid are considered. Increases in the rate of conversion could be even more inflationary unless accompanied by policies to lower excess demand as well as schemes to improve the quality of the current converted sector.

The Rationality of Economic Voting and the Macroeconomic Regime

Since voter rationality plays a major role in theories of political economics, it is important for political analysts to investigate the extent of voter sophistication. A conventional strategy for addressing this question is to determine what decision rule voters appear to use by estimating rival political support models that embody varying assumptions about voter rationality. However, under some circumstances, such a strategy may be incapable of identifying the descriptively superior model due to an observational equivalence problem. The paper estimates the competing political support models under alternative macroeconomic regimes and finds evidence favoring the nonrationalist or adaptive model.