Shadow Price Of Foreign Exchange Research Articles

The shadow price of foreign exchange with minimum wages

This note derives the shadow price of foreign exchange in a small open economy with minimum wage unemployment under tariffs, quotas and voluntary export restraints. The analysis is conducted in a dual general equilibrium framework with many goods and factors.

The true shadow price of foreign exchange

For the last half century, trade theorists, development economists, and development practitioners have been calculating what was claimed to be the shadow price of scarce foreign exchange. In fact, what they have been calculating is the social value of the receipt of a unit of a numeraire good from abroad, typically obtained from real models. In our paper, we explicitly deal with a model of a monetized economy, and we develop formulas for the social value of a unit of foreign currency, which, in general, differ from the traditional formulas.

Shadow prices and trade restrictions in a monetary economy

Using a cash-in-advance (CIA) framework, this paper examines the shadow price of foreign exchange under three types of trade restrictions. The CIA constraint creates a consumption distortion that alters the recipient's welfare. If the effective cash requirement for a unit of the exportable becomes smaller (larger), foreign transfer improves (reduces) welfare and hence the shadow price is greater (less) than unity. Both cases of untied and tied foreign transfer are examined.

The Equilibrium Exchange Rate of the Chinese Renminbi

Two approaches are used in this paper to estimate the equilibrium exchange rates of the Chinese currency, the renminbi (RMB): the purchasing power parity (PPP) model and the shadow price of foreign exchange (SPFE) model. The SPFEs are estimated including tariffs and import quotas. The paper starts with a test for the long-run PPP using quarterly data. In comparison with the estimated equilibrium exchange rates, we find that the actual rates were in general overvalued. From 1990 to 1994, the official exchange rates are found to lie between the PPP rates and the SPFEs. This implies that the Chinese government has adopted an exchange rate policy that maintains official exchange rates close to equilibrium levels.J. Comp. Econom.,March 1998, 26(1), pp. 165–174. The Chinese University of Hong Kong; and Department of Finance, The Chinese University of Hong Kong.

Import Liberalization, Urban Unemployment, and Capital Mobility: a Welfare Analysis

This paper examines the issue of import liberalization in the presence of urban unemployment when capital moves freely in and out of the rural area. To this end, the specific-factors version of the Harris-Todaro model is utilized. Formulas for the calculation of the shadow price of foreign exchange and capital are derived under alternative forms of import restrictions. It is shown that, as compared to an initial situation of capital immobility, international capital mobility, induced by reduction in alternative forms of import restrictions into the rural area is welfare enhancing.

Should The Capital Account Be Liberalized In A Minimum Real Wage Economy?

Sebastian Edwards and Alejandra Cox Edwards in their analysis of the Chilean economic liberalization argue that both capital inflows and outflows may have harmed the Chilean economy. They model the Chilean economy as using labor and fixed factors to produce traded and non-traded goods subject to a binding real wage floor in both sectors. We formalize this model. We discover that a capital inflow may expand or contract employment. We also find that the shadow price of a capital inflow (alias the shadow price of foreign exchange) can be negative only if either the tradable or non-tradable good is inferior.

Tariffs, quotas, and voluntary export restraints with endogenous labor supply

This paper develops a two-good, small-country, general equilibrium trade model with endogenous labor supply and wage taxes, and where trade is restricted by a tariff, or an import quota, or VERs. Within this framework we derive (i) the employment and welfare effects of the three types of trade restrictions, (ii) the price effect of an import quota and VERs, and (iii) the shadow price of foreign exchange under each type of trade restriction. The present results are compared to those where (i) factor supplies are fixed, and (ii) perfect international capital mobility exists.

The shadow price of foreign exchange in a dual economy

This paper examines the shadow price of foreign exchange for a dual economy with tariffs, quotas, or VERs. We show that the shadow exchange rate is greater than the official rate in the presence of tariffs, whereas it is greater or smaller than the official rate in the presence of quotas, depending upon whether capital is sector-specific or perfectly mobile. Furthermore, the shadow exchange rate is unambiguously smaller than the official rate for the VER case when capital is intersectorally mobile. The rate, however, may be larger than the official rate when capital is sector-specific. The practical implications of the results for project appraisal are also discussed.

Increasing returns, urban unemployment, and international capital mobility: A trade policy analysis

This paper compares the effects of tariffs, quotas and VER, both with and without international capital mobility, for a small open economy facing urban unemployment of unskilled labor and external increasing returns in the manufacturing sector. Expressions for the shadow price of foreign exchange and capital are derived under each type of trade restriction. It is shown that international capital mobility in such an economy unambiguously lowers the welfare cost of all forms of trade restriction, in contrast to the existing literature on full employment CRS economy, where international capital mobility unambiguously raises the welfare cost of tariff protection.

External increasing returns and the shadow price of foreign exchange

This paper shows that under external increasing returns to scale and a strictly concave production possibilities frontier the shadow price of foreign exchange in the presence of a tariff is the same as that in an economy with purely constant returns to scale. However, with a quota or a voluntary export restraint, this shadow price is, in general, quite different from that in a purely constant returns to scale economy.

The foreign exchange constraint, suppression of the trade deficit and the shadow price of foreign exchange in a fix-price economy

The foreign exchange gap is analysed as a possible feature of a fix-price economy. The implications of closing the gap by means of import rationing are then discussed. Finally, a set of shadow rates of exchange is derived. These shadow prices are conditional on the prevailing regimes, and include the paradoxical possibility of a negative shadow rate of exchange.

Net social profitability, domestic resource costs, and effective rate of protection

Net social profitability (NSP) and domestic resource costs of foreign exchange earned or saved (DRC) are conceptually related, since each can be derived from the other. The effective rate of protection on value added (ERP) is algebraically identical to DRC if all importable inputs are actually imported or are zero, NSP is zero, and (ERP+1) is multiplied by the shadow price of foreign exchange. A decision rule for allocation of resources is to approve all projects with a positive NSP and a DRC ratio less than the shadow price of foreign exchange. No comparable rule can be stated for ERP, except under special assumptions.

Estimating the shadow price of foreign exchange: An illustration from India

Although there has been a rapid growth in the literature urging the use of shadow prices in cost‐benefit analysis, little attention has been devoted to the estimation of shadow prices or to the feasibility of alternative methodologies for estimating a particular shadow price. This paper is a modest contribution toward meeting this gap. By applying a variety of methodologies, a range of values is determined for the shadow price of foreign exchange for India. The paper also demonstrates a general approach to estimating shadow prices, which in turn emerges from an explicit consideration of the costs and expected benefits of the required research and analysis.

ESTIMATING THE SHADOW PRICE OF FOREIGN EXCHANGE IN PROJECT APPRAISAL

The estimation of the shadow price of foreign exchange under the assumptions of optimal policies and continuing protection for project evaluation in developing countries is discussed. For any given policy alternative, the information requirements of alternative methods of project appraisal are identical. If the appropriate shadow exchange rate is used, alternative methods of project appraisal will give the same conclusion for accepting or rejecting a project. Under the assumption of optimal policies, there will be a need for using a shadow exchange rate to convert domestic values into world market prices. The use of this rate offers advantages over expressing the social opportunity cost of primary factors directly in world market prices. The shadow exchange rate has the advantage that it focuses on the balance of payments constraint of developing countries, and external factors such as world demand conditions, foreign aid, private investment, and debt servicing can easily be taken into account. Policy assumptions have implications for the prices of primary factors, the valuation of products that are not fully traded, and the origin of traded inputs.