Short-term Capital Flows Research Articles

The Interest Rate Parity Theorem: A Reinterpretation

The Interest Rate Parity Theorem: A Reinterpretation

Short-Term Capital Flows and the Foreign Exchange Market

Les mouvements de capitaux 2 court terme et le marche du change etranger. Les auteurs utilisent un modele h sept equations du marche canadien du change etranger fonctionnant durant la periode 1963-70 dans le cadre des regles du Fonds monetaire international relatives au taux de change fixe et ajustable (<< pegged -). L'article contient des estimations de parametres et des resultats de simulations. Le modele est une version amelioree de celui qui a ete presente ici en fevrier 1969; les auteurs y ont ajoute les equations d'accumulation d'actifs necessaires aux simulations dynamiques. Deux caracteristiques differencient ce modele des autres: l'utilisation d'equations distinctes pour la demande generale (a private f) et la demande des autorites (< official -) qui determinent conjointement le taux de change etranger et les variations des reserves de devises; par la suite, l'utilisation de l'identite de la balance des paiements pour la determination des mouvements de capitaux a court terme. Les auteurs se servent de donnees trirnestrielles de la periode 1963-8 pour estimer trois equations stochastiques: deux equations de demande de devises sur le marche courant, l'une de la part des autorites et l'autre generale, et une equation de forme reduite pour le taux de change 'a terme de 90 jours. La simulation dynamique du modele pour la periode 1963-70 donne des resultats qui suivent assez bien les variations des reserves et les taux de change courant et a terme. Les resultats de la simulation de comparaison aux donn6es reelles pour laquelle on a utilise la version du modele consideree la meilleure sont pr6sentes dans le graphique 1. Des simulations de politique ont ete faites pour illustrer les effets des changements du taux d'int6r6t interieur et de la politique de soutien du taux de change A terme. Ces deux politiques ont des effets substantiels sur le niveau des reserves courantes de devises; toutefois, l'utilisation de l'equation d'ajustement en stock relative 'a la demande generale de devises garantit que l'accumulation induite de reserves atteint eventuellement une limite meme en I'absence d'activites speculatives induites.

Short-Term Capital Movements of the United Kingdom, 1963-1967

The paper is addressed to the problem of estimating determinants of capital movements under conditions of substantial destabilizing speculation. Some methodological problems are discussed, and then a stock-adjustment model is presented. Regression results with uncovered interest differentials as variables suggest that U.K. short-term capital flows were sensitive to changes in interest rates and in trade flows and to speculation. Analysis with covered interest differentials shows that forward cover is largely determined by speculation. The latter analysis confirms the efficiency of the British capital market but is unable to separate contributions of individual forces.

THE STRUCTURE OF INTERNATIONAL INTEREST RATES: THE U.S. TREASURY BILL RATE AND THE EURODOLLAR DEPOSIT RATE

A NUMBER OF INVESTIGATORS have recently reported estimates of the sensitivity of short-term international capital movements to international interest rate differentials [1], [4], [7]. While the wide range of their estimates indicates a need for further estimation of this sensitivity, the present study extends the investigation into a closely related area. Even if the relationship between short-term capital flows and interest rate differentials were known with certainty, this knowledge by itself would not allow computation of the net impact of changes in U.S. short-term interest rates on the capital flows. The relationship between relevant pairs of U.S. and foreign short-term interest rates is also needed. Since a recent attempt to explain U.S. private short-term capital outflows suggests a very large sensitivity in these flows to the U.S. Treasury bill rate and the Eurodollar deposit rate, the relation between these rates is investigated in this paper.' The paper is divided into theoretical and empirical sections. The theoretical relationship between the interest rates derived in Section I is based on part of George Horwich's recent theoretical analysis [3]. A flow model of the Eurodollar market is developed in which the suppliers of Eurodollar deposits are analyzed as financial intermediaries and the U.S. bill rate is taken to be the principal determinant of the Eurodollar rate. The model greatly simplifies the complex structure of the Eurodollar market, but the basic character of the market is retained. Stock-flow considerations suggest that the Eurodollar deposit rate adjusts gradually to changes in the U.S. bill rate. In the empirical

AN INVESTIGATION OF MONETARY POLICY ACTION*

THE PURPOSE OF THIS DISSERTATION is to develop and estimate for the post-Accord, 1952-65 period, a policy action function applicable to the Federal Reserve System. The policy action function relates a preferred indicator of monetary policy action, as a dependent variable, to variables affecting monetary policy and to forecasts of exogenous variables, which affect these variables but are not affected by monetary policy action. This problem has received inadequate attention in most theoretical and policy-oriented work. The policy action function is derived from assumptions about lags and exogenous variables affecting policy and from assumptions about policymaker behavior. As suggested by a review of earlier studies, without these assumptions, movements in the chosen indicator of monetary policy could be misinterpreted. For example, changes in a popular indicator, the level of free reserves, could be induced either by policy action, by movements in the asset demand functions of the banks, or by feedbacks from earlier policy action. Total reserves adjusted for legal reserve requirement changes is selected as a preferred indicator of policy action. It is considered, for purposes of this study, superior to all other indicators because feedback from the real sector to it is most readily known and compensated for by the policymaker, because it reflects changes in the three conventional tools of policy (open market operations, changes in the discount rate, and reserve requirement changes) and because it is immediately measurable. This indicator enters into the money supply function in a Keynesian-type model of the economy. The transmission of policy is postulated as flowing from the indicator to the money supply to the long-term interest rate to investment to aggregate demand to unemployment, the price level, and other real variables affecting policy. The lag from a change in the long-term interest rate until an effect is observed on the real variables is assumed to be one quarter. After substituting endogenous solutions for the real variables into a simple utility function for the policymaker, a policy action function is mathematically derived. It contains the indicator as the dependent variable with both endogenous and several forecasted exogenous variables as independent variables. This function is tested by standard single-equation least squares regression analysis. The results suggest that the policymaker responded systematically to the real variables: unemployment less a 4 percent goal, the squared difference between the general price level and its goal, a balance of payments measure (first differences in foreign-held, short-term liabilities as a percentage of gold reserves), and the forecasted level of income. In addition, foreign economic activity (represented by a proxy for foreign, long-term interest rate levels) evoked a policymaker response, as it affects the payment's balance. Also shifts in the balance of payments situation in the 1961-65 period, five years of heavy short-term capital flows, induced responses by the policymaker. In the conceptual framework of this study, these were the actual determinants of monetary policy action.

TRIANGULAR ARBITRAGE AND FORWARD EXCHANGE POLICY: REPLY

The Journal of FinanceVolume 19, Issue 3 p. 552-554 Communication TRIANGULAR ARBITRAGE AND FORWARD EXCHANGE POLICY: REPLY Herbert G. Grubel, Herbert G. GrubelAssistant Professor of Economics, University of Chicago.Search for more papers by this author Herbert G. Grubel, Herbert G. GrubelAssistant Professor of Economics, University of Chicago.Search for more papers by this author First published: September 1964 https://doi.org/10.1111/j.1540-6261.1964.tb02874.xCitations: 2 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat No abstract is available for this article.Citing Literature Volume19, Issue3September 1964Pages 552-554 RelatedInformation

Real Growth, Monetary Disturbances and the Transfer Process: The United States, 1879-1900

In recent literature there has appeared a revived interest in the international transfer mechanism by which the occurrence of foreign borrowings becomes a loan in real goods. papers dealing with this somewhat old fashioned topic, both theoretical1 and a lesser extent empirical,2 have presented very strong cases which suggest that the classical interpretation would benefit considerably by the addition of a number of modern theoretical notions and by a general shift in emphasis. intention of this essay is definitely not add the swollen bibliography on the theory of transfer. On the contrary, my purpose is simply attempt a crude evaluation of both classical and modern theory of transfer when applied one episode of economic history. Perhaps the most famous empirical test of the Hume specie-flow mechanism, as an explanation for the real transfer, was performed by Jacob Viner.3 Viner's laboratory of study was a period in Canadian development from 1900-13. Hume specie-flow mechanism, and the role that it plays in the classical transfer, is standard equipment taught undergraduates in their first encounter with international trade theory. Briefly, and at the risk of trying the reader's patience, it is as follows: under a gold s andard system, and with the occurrence of a significant inflow of capital, an inflow of gold is precipitated by the exchange rate moving the gold import point. Assuming that the money supply is responsive that inflow, prices should rise in the receiving country and fall in the lending countries. result of the relative price movements is, of course, stimulate imports and depress exports in the borrowing country thus creating a tendency towards a deficit in the trade balance and current account. In this way, and ignoring accommodating short term capital flows, the real transfer process in goods begins. Viner's study of Canadian experience exhibited evidence which confirmed the Hume specie-flow mechanism. Since that study was made, there have been a number of suggestions of alternative theories which could have fit the evidence equally well. However, it wasn't until recently that Meier explicitly examined new data applicable this period in Canadian development and attempted to supplement Professor Viner's study by recognizing the relevance of income analysis and the historical context of economic development.4 Meier's sugges* I am indebted Moses Abramovitz, David C. Cole and Millard F. Long for their useful comments. They are not responsible, of course, for any errors remaining. 1See for instance Harry G. Johnson, The Transfer Problem and Exchange Stability, Journal of Political Economy, June 1956, pp. 21225; Paul A. Samuelson, The Transfer Problem and Transportation Costs, Journal, June 1952, pp. 278-304 and Samuelson's subsequent article in the same journal, June 1954, pp. 264-89. 2G. M. Meier, Economic Development and the Transfer Mechanism, Canadian Journal of Economics and Political Science, February 1953, pp. 1-19. James C. Ingram, Growth in Capacity and Canada's Balance of Payments, American Review, March 1957, pp. 93-104. 'Jacob Viner, Canada's Balance of Indebtedness, 1900-13 (Cambridge, Mass., 1924). For a more modern inductive study of the classical model of the transfer mechanism see George Macesich, Sources of Monetary Disturbances in the United States, 1834-1845, Journal of History, September 1960, pp. 40734. 'Meier, Economic Development and the Transfer Mechanism, op. cit., p. 1, italics mine. present author reached a similar conclusion in International Trade and United States Eco-