Optimal Intervention Policies Research Articles

THE POLITICAL CHOICE OF THE EXCHANGE RATE REGIME*

The purpose of this paper is to present a model in which the choice of the optimal exchange rate regime is envisaged in a political setting. We consider a country whose voting population comprises three types of agents, importers, exporters and speculators, who select their position on exchange rate policy according to welfare maximization. As a result, well‐defined interest groups are shown to emerge. Each coalition makes contributions to one of two political candidates running for political office in support for their optimal policy intervention. When policy pronouncements by the two candidates are made in terms of exchange rate volatility, the equilibrium consists of two extremes: a fixed versus flexible exchange regime, the latter with bounded volatility [JEL D72, F31].

Optimal intervention policies for a region facing pollution-induced uncertainty

This paper examines optimal interventions in the presence of externality-induced uncertainty. A regional model of three activities involving polluting, nonpolluting and pollution-abating industries is developed, and a Taylor series technique is utilized to represent a stochastic regional utility function. Optimal intervention policies in the forms of output or input taxes and subsidies are then deduced and analyzed.

Formulating optimal state early childhood intervention policies.

This article presents the results of a survey of early childhood intervention policies in all 50 states and the District of Columbia, regarding handicapping conditions served, overseeing agencies, intervention services, funding sources, interagency contracts, state regulations, training and certification, and supply and demand of professionals. The study as a whole shows extensive variation among the states with respect to policy; funding, lead agency administration, and interagency cooperation were less than optimal. Moreover, the survey documented a dramatic national shortage of trained early childhood personnel. Implications are discussed in terms of the provisions of P.L. 99–457, the Education of the Handicapped Amendments of 1986.

Monetary Restraint and the Exchange Rate

This paper examines the short-run response of the exchange rate and the level of interest rates to an unanticipated change in monetary policy.l In particular, a sudden reduction in the rate of monetary expansion is postulated in an economy with a floating exchange rate. Will the exchange rate overshoot its long-run path, as in the case of a discrete change in the nominal money stock? Will interest rates, traditional indicators of monetary conditions, rise in response to this move towards monetary restraint? Despite a growing literature on the determination of exchange rates, and a general acceptance of the key role of monetary policy in influencing the foreign exchange market, this particular question has not received much attention.' This is probably because authors have preferred to examine the normative question of optimal exchange market intervention policy.2 In Section I we take the simplest case, where the exchange rate is determined by the actions of speculators with perfect foresight, or equivalently of riskneutral speculators with rational expectations. The long-run or steady-state path-where all prices adjust instantaneously-is contrasted with the .exchange rate consistent with subject to the slow adjustment of some domestic prices. We show that this latter path, which will be referred to as the momentary path (or, where there is no risk of confusion, simply as the equilibrium path), need not overshoot the steady-state path. Nevertheless, the nominal interest rate will always fall in this case. In Section II we show that risk aversion on the part of speculators is likely to reduce the incidence of overshooting, and should moderate the tendency of the interest rate to fall.3 Although they are still allowed myopically rational expectations, speculators in Section III make transitory errors in forecasting the long-run equilibrium. This behaviour can lead to the intuitively plausible pattern of an initial increase in nominal interest rates and a gradual rather than sudden response of the exchange rate. This discussion of a variety of models allows an interplay between theory and practical experience. On the one hand, doubt is cast on the realism of certain models which give implausible results, while on the other hand, models that pass the test of plausibility provide an insight into the forces governing the reaction of financial market variables to policy change.

On the choice between capital and labour mobility

Trade theorists, since the pioneering work of Kemp (1966). have considered the question of national advantage from international factor mobility by considering only one factor to be so mobile. Kemp analyzed elegantly the question of optimal policies in 2 x 2 x 2 model and showed that, since monopoly power could exist in both the goods and factor markets in consequence of international capital mobility, the optimal policy intervention would generally involve two policy instruments: tariffs (-cum-subsidies) on goods and duties(-cum-subsidies) on international capital flows. Jones (1967) subsequently extended Kemp’s argument to the secondbest context by examining the optimal level of one of these instruments when the other was arbitrarily set at zero. Elsewhere in this issue, Brecher (1983) shows, in an elegant and original contribution, that the Jones policy problem is, in fact, a third-best, rather than a second-best, problem, as generally believed, and that if only one of the tariff and capital mobility taxes(-cumsubsidies) can be used, it is generally possible to improve welfare further by admitting an altogether different, domestic policy instrument: namely a production or consumption tax-cum-subsidy, as the case may be.’ *The research of Bhagwati was supported by the German Marshall Fund Grant No. l-34015. The problem analyzed in the paper was posed in Bhagwati (1979) and an early ingenious and neglected analysis in Ramaswami (1968) was noted by Bhagwati. We have profited greatly from these contributions; also from reading Webb (1970), Ramaswami (1970) and a recent paper of Calvo and Wellisz (1983) on this problem. ‘This result is in consonance with the results of Bhagwati, Ramaswami and Srinivasan (1969) for the case without international capital mobility; but the consonance is ‘intuitive’ only after the result was established for the case with international capital mobility.

The Optimal Frequency of Adjustment to Balance of Payments Disturbances

It is generally presumed in the literature on international liquidity that continuous adjustment to balance of payments disturbances is the optimal intervention policy for a government to adopt. Emil-Maria Claassen has recently questioned this traditional viewpoint [2], and has attempted to show that infrequent or discrete adjustment is a lower cost policy.' This is an important challenge to a generally accepted, but admittedly unexplored, assumption underlying most of the analysis on the demand for international reserves. Claassen has raised a question which must be addressed. Intervention policy must deal simultaneously with different types of disturbances in the balance of payments. However, Claassen's concern is with the optimal adjustment policy only under conditions of balance of payments equilibrium. In this context, which is the conventional approach in the theoretical literature on international liquidity, all balance of payments disturbances are random or stochastic in nature. In the discussion which follows, we will be abstracting from the non-stochastic and non-equilibrium types of disturbances in the balance of payments. This paper will show that, under conditions of fundamental equilibrium, the question of the optimal frequency of adjustment to balance of payments disturbances actually turns on the stochastic pattern of the disturbances. We will define three alternate cases of balance of payments outcomes based upon different possible patterns of disturbances. Then we will determine the lowest cost adjustment policy in each case and consider which case seems to most accurately reflect the real world. Based upon this analysis, it appears that Claassen's findings are valid under one pattern of disturbances only, and this case usually does not hold in the real world. Therefore, continuous adjustment would normally be the optimal intervention policy for governments to adopt.

Market disruption, export market disruption, compensation and GATT reform

This paper analyzes the problem of market disruption as it currently afflicts the exporting countries, chiefly LDCs. Based on the analysis of optimal policy intervention under endogenous uncertainty, developed by Bhagwati and Srinivasan ( Journal of International Economics, November 1976), it develops a complete set of rules by which the developed and less developed countries may abide, under a revised GATT code, when faced by the problem of increased competitiveness of LDC exports to DC markets. These rules include the compensation of LDCs by DCs, in varying degrees, for both potential and actual exercise of import restrictions by DCs.

Optimal trade policy and compensation under endogenous uncertainty: The phenomenon of market disruption

The paper examines the nature of optimal policy intervention required in the exporting country when there is the possibility of a market-disruption-induced trade restriction being invoked by the importing country. The analysis is conducted primarily with a two-period model, with and without adjustment costs, and the results are related to the well-known policy prescriptions of Bhagwati, Ramaswami, Srinivasan, Johnson et al. in the theory of trade and welfare. The last section extends the argument briefly to steady state analysis. The applicability of the analysis to the symmetric, embargo problem is also noted.