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- Cuddington, John T.
(författare)
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A Fix-Price Trade Model with Perfect Capital Mobility : Fixed versus Flexible Exchange Rates
- 1983
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Rapport (övrigt vetenskapligt/konstnärligt)abstract
- This paper extends the two-sector analysis of macroeconomic policies in temporary equilibrium with quantity rationing to include both money and internationally traded bonds as financial assets. By eliminating the assumption that money is the only asset, an acceptable treatment of flexible exchange rate regimes becomes possible. The efficacy of Monetary, fiscal, and wage policies is compared under alternative non-market-clearing regimes and exchange rate systems. Noteworthy is the dramatic differences in the sectoral output effects of fiscal policy under different unemployment and exchange rate regimes. It is demonstrated that the use of the well-known Mundell-Fleming model, which presumes a simple (one-sector) Keynesian unemployment structure, when an economy is in fact suffering from classical unemployment could lead to major policy errors. Most strikingly, increased government spending is shown to be contractionary in the presence of classical unemployment under flexible exchange rates. This is a consequence of the adverse effect of the resulting exchange rate appreciation on the tradeable goods sector.
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| 4. |
- Cuddington, John T., et al.
(författare)
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Exchange Rate Forecasting and the International Diversification of Liquid Asset Holdings
- 1983
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Rapport (övrigt vetenskapligt/konstnärligt)abstract
- This paper re-examines the potential gains from diversifying liquid asset holdings internationally. In particular, it recognizes the fact that international investors must forecast the expected returns and evaluate the exchange risks associated with foreign assets before the optimum diversified portfolio can be selected. Using three possible forecasting techniques (the martingale, submartingale, and forward rate models), we conclude that the warranted degree of international diversification, in terms of the number of assets that should be held, is quite limited. Furthermore, the expected ex ante return from undertaking such diversifiation is not large. It is in the range of two to four percent per quarter depending on the associated risk according to the ex ante efficiency frontiers. More importantly, the actual returns received by investors who diversified optimally ex ante were invariably less than the investor anticipated. The implication is that investors are not being adequately compensated (in terms of realized returns) for the risks they incur in diversifying their liquid asset portfolios internationally. The use of ex post data in previous studies of the gains from international portfolio diversification may result in an overestimation of the benefits that are likely to be reaped relative to the associated foreign exchange risks. This is, in large part, due to the extreme difficulty in making accurate exchange rate forecasts in the volatile floating-exchange-rate environment of the post-Bretton Woods era.
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| 5. |
- Cuddington, John T, et al.
(författare)
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Optimal policy rules and regime switching in disequilibrium models
- 1985
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Ingår i: Journal of Public Economics. - : Elsevier BV. - 0047-2727 .- 1879-2316. ; 27:2, s. 247-254
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Tidskriftsartikel (refereegranskat)abstract
- This paper emphasizes the need to search for globally optimal policy levels (for public production, say) in fix-price disequilibrium analysis. Regime-specific rules are inadequate. They ignore the fact that moving a policy towards its optimal level may move the economy from its initial disequilibrium regime to a different regime where the rule no longer applies.
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| 6. |
- Cuddington, John T., et al.
(författare)
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Optimum Tariffs, Revenue-Maximizing Tariffs and Unemployment : A General Disequilibrium Analysis
- 1983
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Rapport (övrigt vetenskapligt/konstnärligt)abstract
- This paper uses recently developed non-Walrasian equilibrium models of open economies to characterize the optimum tariff under both Classical and Keynesian Unemployment regimes. The existing literature concentrates on the former. Keynesian unemployment has notbeen considered, presumably because of the difficulty integrating macroeconomic models of unemployment and microeconomic policy analyses in the presence of domestic distortions. Interestingly, the optimum tariff under either type of unemployment may lie above the revenue-maximizing tariff in contrast to the well-known result obtained in the Walrasian equilibrium context.
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| 7. |
- Cuddington, John T.
(författare)
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Portfolio Balance and IS-LM : A Marriage under Fixed Exchange Rates
- 1982
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Rapport (övrigt vetenskapligt/konstnärligt)abstract
- The past fifteen years has witnessed a thorough reconsideration of the theory of international capital flows and monetary policy in open economies. Much of this work is based on the concept of portfolio balance and stock-flow equilibrium. The present paper develops a tractable way of incorporating portfolio balance into a modified IS-LM model, thereby bringing the much-used framework into line with modern thinking about financial equilibrium under foxed exchange rates. In so doing, the interrelationship between monetary and exchange-market intervention policies is emphasized. This permits a consistent treatment of short-run financial market equilibrium and balance of payments considerations. To illustrate the usefulness of the resulting "IS-PB" model, a balanced-budget increase in givernment expenditure is examined under alternative monetary stances consistent with the fixed exchange rate. The scant treatment of fiscal policy (relative to monetary and exchange rate policies) in the open-economy portfolio balance literature is thereby partially remedied. A second application considers the effects of foreign interest rate shocks. The model accurately captures the policy choices facing countries attempting to maintain fixed exchange rates during 1981 when U.S. interest rates were forced up dramatically in an effort to bring inflation under control.
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