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Exchange rates are causing the problems for U.S.
|
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| Straydog 2006-09-18, 7:57 am |
| | |
| Kamal R. Prasad 2006-09-18, 7:57 am |
|
Straydog wrote:
> For a long time Kamal Pra has complained that all the world's problems
> are caused by the US, the US strong dollar policy, the US debt, the US
> trade deficit, the US standard of living, and anything else that can be
> blamed on the US and that no other country on earth, in all of history did
> anything wrong. Pat Choate's book "Agents of Influence" discusses in
> considerable detail how various tricks by Japan, over many decades, have
> benefitted Japan and at the expense of US and its industries (electronics,
> cars). Now, India and China are doing the same thing. Guys like Kamal love
> to tell us how "its all the fault of the US" and its just
> anti-US propaganda.
>
It isn't. Im advising you to bring parity for the sake of the american
middle-class.
> For almost as long, I have counter-complained that a great deal of the US
> trade deficit is due to exchange rates being in favor of poor countries by
> making their exports cheap and their imports too expensive for them. Belo=
w is
or it could have been the other way round -i.e. a coterie of rich
countries conspiring to push down currencies of 3rd world countries
with their cheap tricks. The strong dollar policy -as stated by yout
govt officials on US govt websites -is about inflating the USD
regardless of how other central bankers react, and about assuring
currency traders that if they bet in that direction, they have the
support of the US govt and consequently the US treassury/mint. How can
you blame OTHER countries for the policies of YOUR govt? You can blame
them for their own policies -which you have done wrt China and I am not
contesting that.
As regardes India, you have a lame duck explanation of British
spirits not being allowed to sell in India. Thats something to do with
tariff barriers -not exchange rates. If the WTO treaty allows them
access, they might be able to get it -and if it doesn't as yet -they
will get it, once the stalled WTO talks are resumed and a deal is
reached.
> a very recent report on how the exchange rate manipulation is now
> getting the attention of appropriate officials and this is getting into
> the public media. Below that is another reference on how India cheats on
> trade. And, below that, web-accessible reference on how India manipulates
> it exchange rate.
>
> ****** exchange rate crackdown *****************
>
> WSJ, sat/sun, sept 16-17, 2006, page A2:
>
> title:"U.S., Allies S Currency Crackdown"
> by Michael M. Phillips
>
> full quote
>
> Singapore- The U.S. and its major allies are working to give the
> International Monetary Fund greater power to crack down on
> countries that meddle with exchange rates to gain an edge in
> international trade.
>
> At a series of meetings here this wend, top financial
> officials from the Group of Seven major industrial nations are
> expected to press for new IMF rules that would make it easier for
> the global economic watchdog to brand a country for manipulating
> its exchange rate--and, in theory, embarrass it into stopping.
>
So is the US govt embarassed by its strong dollar policy? I would say
that it is loathe to admit that the policy has back-fired on it.
> The U.S.-led push comes at a time when the Bush administration
> faces enormous pressure from Congress, manufacturers and unions
> to confront China over its currency practices. Beijing, they
> argue, keeps the yuan artificially weak against the dollar,
> giving Chinese firms a huge competitive advantage over their
> American counterparts by making Chinese exports cheaper.
>
> As a result, markets will likely parse every currency-related
> comment that the new U.S. Treasury secretary, Henry Paulson,
> utters both in Singapore and when he makes his first official
> visit to China next w. Mr. Paulson, a former chief executive
> of Goldman Sachs Group, Inc., with long experience in China, has
> promised a patient approach to the Asian powerhouse, but has also
> said it is imperitive that Beijing loosen its grip on the yuan.
>
> Amid the controversy over China's currency practices, Timothy
> Adams, undersecretary of the U.S. Treasury for international
> affairs, says there is a "strong emerging consensus" among the
> big countries that it is time to rewrite the international rules
> of the road regarding exchange rates.
>
and when that happens or when the US govt finally strops dragging its
feet and relents -you will not see fully functional engg
depts/call-centres in the US being shunted to India, nor will you see
people put up with slavery for fast cash aka US dollars. People will
stay in the country where they are most comfortable and get paid not
for who they are in terms of citizenship/race, but for what
productivity they show. For those who expect higher salaries and
consequently higher stds of living on account of their citizenship/race
-Id like them to think about whats going to finance it, in the absence
of a fountain of wealth [for which they can collect royalty and enjoy].
> Those rules should establish, Mr. Adams says, "in a modern world,
> what do beggar-thy-neighbor policies look like?" What is and is
> not acceptable behavior?"
>
> Brazil, Egypt and some other developing nations, however, are
> resisting the effort by the G-7, whose members include the U.S.,
> Britain, France, Germany, Italy, Canada and Japan. Developing
> countries see the initiative as an attempt to hand the IMF, which
> provides rescue loans to troubled countreis and often demands
> austere economic policies in return, yet another stick with which
> to force its will on those too weak to resist.
>
I would like to see the Rupee appreciate against the USD. It will help
to finance the infrastructure buildup of the country and reduce the
difference in wages for those not intending to go to the US. Why on
Earth would you think Im going to wish otherwise?
> "It's important for the IMF to exercise its mandate in an
> evenhanded manner, and not be influenced by one or two
> countries," says Khor Hoe Ee, assistant managing director for
> economics at the Monetary Authority of Singapore. "The IMF needs
> to engage the Asian region to the the rich diversity of views
> that could contribute to the multilateral surveillance issues."
>
> Singapore, which itself regularly intervenes in the market for
> Singapore dollars to combat domestic inflation, is playing host
> to the IMF annual meetings.
>
> For the past two yeasr, the IMF has been pondering how to sharpen
> its monitoring of the exchange-rate practices of its 184 member
> nations. Mr. Adams, however, jump-started the process a year ago
> with a speech accusing the IMF of being "asleep at the wheel"
> when it comes to exchange rates.
>
> Currently, the IMF follows a set of rules, originally drafted in
> 1977 following the 1973 collapse of the international gold
> standard and fixed-exchange-rate system. Those rules generally
> require the IMF to discern whether a country intends to cheat the
> system through its exchange rate. Among the warning signs the IMF
> is supposed to look for are official restrictions on capital
> flows and unsustainable government borrowing.
>
What they have in place is an out-dated system that doesn't understand
that cost of living affects job growth and consequently disposable
income/savings rate of a country.
> "If these are the only things you're looking at, you haven't got
> a very good handle on a country's foreign-exchange policy or
> whether it's manipulating" its currency, a senior IMF official
> says.
>
> Under U.S. trade law, every six months the Treasury must issue a
> report indentifying any country that manipulates its currency,
> using the IMF definition. Despite the complaints about China's
and the US is one such country.
regards
-kamal
> practices, the Bush administration has never listed it. The
> decisions have a large foreign-policy component, but Treasury
> officials have also blamed their decision on their inability to
> prove Beijing intends to manipulate the yuan.
>
> Now IMF Managing Director Rodrigo de Rato is championing a plan
> that would define manipulation by looking at whether a country's
> action leave its exchange rate out of whack with economic
> realities. The IMF would then identify offenders and exert public
> pressure for changes.
>
> Mr. Adams says the IMF is not on the right track and that he
> hopes that member governments at Sunday's IMF board meetings will
> offer at least general support for the idea of rewriting the old
> rules. The details would then be negotiated in coming months.
>
>
> ****** how India cheats on trade ***********
> Date: Fri, 18 Aug 2006 15:47:06 -0400
> Subject: India: Cheating on trade .....
>
>
> Financial Times, Aug 8, 2006, page 5:
>
> "EU threatens India over whisky tariffs"
> by Andrew Bolger in Edinburgh
>
> Quote all:
>
> India will be referred to the World Trade Organization unless it ceases to
> discriminate against European spirits and wines, the European Commision
> has warned.
>
> The eight-month investigation by the [EC] confirmed that India's duty
> system amounted to "blatant violations" of WTO rules and unfairly
> distorted competition by subjecting imported bottled spirits to a much
> higher tax burden--up to 550 per cent on Scotch whisky--than faced by
> Indian distillers, with the effect that "the Indian Markethas remained
> essentially closed for imported wines and spirits."
>
> In a strongly worded report, the Commission noted the refusal of India to
> co-operate with the investigation and recommended that unless is moved to
> "rapidly abolish" its discriminatory duty arrangements for whisky and
> other imported spirits, the EU should start WTO dispute settlement
> proceedings in Geneva.
>
> The Commission said the size of the Indian market for spirits in 2004 was
> estimated at 87m nine-litre cases, making it a big international market
> for spirits and thew world's largest market for whisky.
>
> India is an important emerging market for Scotch whisky, buying exports
> worth [pounds]25.9m ($49.4 m, [Euro]38.4m) last year, buth this was less
> than 1 per cent of India's spirits market. [please read this sentence
> carefully->] In contrast, all Indian spirit drinks are imported into the
> EU tariff free.
>
> Gavin Hewitt, chief executive of the Scotch Whisky Association, said: "We
> hope that India will now swiftly bring its fiscal regime into line with
> international trade rules without the need to resort to a WTO panel
> hearing in Geneva. However, if not early change is made, we support the
> recommendation that the issue should be referred to the WTO.
>
> "Scotch whisky producers have campaigned for years for fair market access
> to India."
>
> end of article
>
>
> ***** how India manipulates its exchange rate ****
> From asd@panix.com Mon Jul 31 23:03:41 2006
> Date: Mon, 31 Jul 2006 23:03:41 -0400
> From: Straydog <asd@panix.com>
> Newsgroups: alt.computer.consultants, alt.politics.economics, sci.econ,
> sci.research.careers
> Subject: India: Manipulates its exchange rate to benefit itself...
>
>
> (Large article farther below)
>
> Being that Kamal Pra has made endless accusations against the USA,
> including against our "inflated" USD, our (he says) nonexistent "fountain
> of wealth", and our too high standard of living, and that we manipulate
> our currency (how about China?), slurs against US society regarding
> slavery and other offensiveness, and being that tons of pro-India
> propaganda has been plastered all over these newsgroups for 1-2 years, or
> more, I have done a little homework on why Indian labor, as paid for
> through the exchange rate (a key factor, I think, in the developed
> world's problems with cheap labor), is generally cheaper than in the
> developed world. Here is one paper (authored by Indians) and its reference
> (obtained through Google) that talks about part of this in detail. The
> formating is a rough conversion from HTML, and the tables are destroyed,
> and the original URL ended in 404, but you can grasp the gist of the paper
> from reading the text. See below....
>
> =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=
3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=
=3D=3D=3D=3D=3D=3D
>
> Used this (is is sent without a cr line break):
>
> http://scholar.google.com/scholar?h...f_eMT9_wogJ:ww=
w=2Eicrier.res.in/pdf/Srivastava. PDF+history+of+rupee+exchange+rate[color
=darkred]
>
> The URL below did not work for me. Below is the textized version of the
> HTML document that Google obtained.
> =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3DBelo
w is provided by Google=3D=3D=3D=[/color]
=3D=3D=3D=3D
> This is the html version of the file
> http://www.icrier.res.in/pdf/Srivastava.PDF.
> *G o o g l e* automatically generates html versions of documents as we
> crawl the web.
>
> /Google is neither affiliated with the authors of this page nor
> responsible for its content./
>
> These search terms have been highlighted: *history * *rupee *
> *exchange * *rate *
>
> ------------------------------------------------------------------------
> *Page 1*
>
> *SOME IMPLICATIONS OF REAL *EXCHANGE **RATE* *
> *TARGETING IN INDIA*
> *Urjit R. Patel*
> *Reserve Bank of India*
> *Pradeep Srivastava*
> *Indian Council for Research on International Economic Relations*
> October 1997
> (Revised)
> /*Abstract*/
> /The paper examines some macroeconomic implications of *exchange **rate*
> policy against the /
> /broader backdrop of structural adjustment programmes. In particular,
> the evolving/
> /implications for inflation and the real interest *rate* arising from
> short-run policies regarding/
> /the real *exchange **rate* (RER) are analysed for the Indian economy,
> which is undergoing/
> /cautious but substantial liberalisation of financial markets and the
> external sector. The/
> /paper also investigates the role of important macroeconomic
> (behavioural and policy)/
> /variables in explaining the long-run movements of the RER in India. /
> JEL classification: F41.
> ------------------------------------------------------------------------
> *Page 2*
>
> *Foreword*
> Most countries today view high export growth as critical for their
> development efforts.
> Consequently, nominal *exchange* rates are often formulated with a view
> to targeting some
> real *exchange **rate* that will make exports competitive.
> In the wake of the South-East Asian crisis, India's exports are likely
> to come under
> increasing competitive pressure as these economies recover from the
> post-crisis liquidity
> squeeze to fully exploit the benefits from their sharply depreciated
> currencies. *Exchange*
> *rate* management and real *exchange **rate* targeting are likely,
> therefore, to acquire greater
> importance than usual for policy makers in India in the coming months.
> A policy of real *exchange **rate* targeting usually aims at controlling
> the level of real
> *exchange **rate* either in an effort to keep it at a constant level in
> the face of domestic or
> external shocks or to achieve a different (typically more depreciated)
> level. However,
> despite government efforts to target the real *exchange **rate*, it is
> also true that the real
> *exchange **rate* is not a policy tool in the long run. Thus, real
> *exchange **rate* targeting is only
> possible in the short to medium term; deviations from the long run
> equilibrium have
> macroeconomic costs. Specifically, policies of depreciating the nominal
> *exchange **rate* to
> achieve more depreciated levels of the real *exchange **rate* can lead
> to higher levels of
> inflation in the economy when capital mobility is low. In case of high
> capital mobility, these
> costs are manifest in higher real interest rates in the economy.
> This paper by Urjit R. Patel and Pradeep Srivastava investigates the
> macroeconomic costs of real *exchange **rate* targeting in India to
> assess the extent to which
> nominal depreciation can result in higher inflation or real interest
> rates in the economy.
> Since nominal depreciation can affect the real *exchange **rate* only
> temporarily, the paper
> also analyzes the determinants of real *exchange **rate* in India over
> the long run.
> It is hoped that the rigorous analytical framework of this paper will
> help clarify the
> complex issues arising from *exchange **rate* management in an open
> economy.
> *(Isher Judge Ahluwalia)*
> Director & Chief Executive
> ICRIER, New Delhi
> ------------------------------------------------------------------------
> *Page 3*
>
> 1
> *SOME IMPLICATIONS OF REAL *EXCHANGE **RATE* TARGETING IN INDIA*
> *I.*
> *Introduction*
> Beginning with the Southern Cone countries of Latin America in the 1970s,
> structural adjustment programs have now been implemented in an
> overwhelming majority of
> countries worldwide. In India, structural reforms were initiated
> tentatively in the mid-eighties
> and more substantially following the external account crisis in 1991.
> 1
> .
> The consequent
> transformation of the economy, resulting from increasing liberalisation
> of the external and
> financial sectors, is likely to pose new challenges for the Indian
> policy makers. This paper
> focuses on one such issue by analysing important links between *exchange
> **rate* policies
> and domestic financial variables. A defining characteristic of the
> Indian reforms (and some
> earlier Asian experiments) has been the cautious pace of adjustment
> relative to the `shock
> therapy' of Eastern Europe or the rapid liberalisation undertaken in
> some Latin American
> countries. The Indian economy is currently on the threshold of full
> capital account
> convertibilty which will be a culmination of a process initiated as many
> as six years ago.
> This slow transition, therefore, provides an excellent opportunity to
> study the evolving links
> between the external economy and domestic financial variables. To that
> extent, the
> analysis presented here is also of some interest to many other countries
> that too are
> attempting similar adjustment towards greater integration into the
> global economy.
> The importance of *exchange **rate* management is related to the fact
> that the
> emphasis, in most structural adjustment programs, on boosting export-led
> growth by
> increasing the country's competitiveness has meant that *exchange
> **rate* policies and the
> real *exchange* rates are increasingly viewed as critical determinants
> of a country's
> performance. When not fully flexible - as in most developing countries -
> nominal *exchange*
> rates are often formulated by governments with a view to target some
> real *exchange **rate*
> (defined as the price of domestic goods relative to foreign prices). A
> policy of `real
> *exchange **rate* targeting' usually aims at controlling the level of
> the real *exchange **rate*,
> either in an effort to keep it at a constant level in the face of
> domestic or external shocks, or
> achieve a different (typically more depreciated) level (Calvo et. al.
> (1995)).
> A good example of RER targeting is provided by Brazil where, since 1968, =
the
> nominal *exchange **rate* was changed by small percentages at irregular
> intervals of time,
> depending upon the inflation differential between Brazil and the United
> States (Calvo et. al.
> (1995)). Other Latin American countries have also followed such rules:
> for example,
> Colombia between 1986 and 1990, and Chile between 1985 and 1992.
> RER targeting does not appear to be confined to Latin American countries
> alone. In
> 1.
> For comprehensive formal analysis and discussion of the crisis, and the
> reform
> programme undertaken in its aftermath, see Buiter and Patel (1992; 1997).
> ------------------------------------------------------------------------
> *Page 4*
>
> 2
> Table 1 below we present deviations of the nominal (bilateral)
> *exchange* rates from the PPP
> *exchange* rates for four Asian countries (Malaysia, Indonesia, Korea
> and China). The latter
> are computed as the ratio of nominal *exchange **rate* times P
> *
> (U.S. CPI) to P (the domestic
> CPI), and set equal to the actual value of the *exchange **rate* in
> 1980. Values for the
> subsequent years are updated from this date onwards. It is found that
> China, Korea and
> Indonesia have aggressively sought to keep their currencies increasingly
> `undervalued'
> against the U.S. Dollar; in other words, compensating for higher
> inflation alone does not
> fully explain the extent of the relevant currency's decline in value.
> Malaysia, on the other
> hand, has kept its RER at a relatively constant level. For example, from
> 1987-1995,
> Malaysia maintained its currency at approximately 10% discount from the
> RER of 1980.
> Table 2 presents similar data on the nominal (bilateral) *exchange
> **rate* in India over
> the same period computed using the method above. It is seen that for
> most of the sample
> period, i.e., 1980/81-1996/97,
> 2
> .
> the observed *exchange **rate* was dramatically undervalued
> relative to the PPP *exchange* rates. This is more sharply evident in
> Figure 1 which shows
> the behavior of the real *exchange **rate* in India using monthly data
> for 1980:1-1997:3.
> 3
> .
> The
> nominal *exchange **rate* and the PPP *exchange **rate* are also shown
> in the same figure.
> Between 1980 and 1996, the RER in India has more than doubled. As noted
> above, this
> period has been characterized by substantial changes in policies,
> beginning in 1985 and
> accelerating in 1991. However, it can be seen that the gap between the
> nominal and the
> PPP *exchange* rates has widened steadily since 1981, with the period
> after 1987 showing a
> significant increase in the gap. This is, of course, linked to the large
> devaluations in 1991
> and 1993. Thus, the *rate* of devaluation in India since 1981 has far
> exceeded the inflation
> differentials between India and the rest of the world, the latter
> proxied here by the US *rate*
> of inflation. This would be consistent with attempts by the government
> to target the RER
> and enhance India's external competitiveness.
> Needless to say, the doubling of the RER does not by itself indicate
> targeting by the
> government. Indeed, one could argue it shows just the reverse: that the
> economy has been
> buffeted by adverse shocks that entail a depreciating RER for
> equilibrium, and that the
> government has passively allowed the shocks to pass through into the
> RER. However, it is
> difficult to conceive of such major adverse shocks to the economy in the
> past 15 years. In
> particular, for most of the 1990s, the monsoons have been good, price of
> oil stable,
> changes in external terms of trade relatively small, and fiscal deficits
> relatively
> conservative.
> 4
> .
> Indeed the most significant shocks to the economy have been in the form of
> large-scale policy reforms in the 1990s. Following Dornbusch and Werner
> (1994), however
> one could argue that the trade and financial reforms undertaken in India
> should result in a
> stronger currency, i.e., a real appreciation. Finally, as seen during
> October 1995 to
> 2.
> The Indian financial year runs from April to March.
> 3.
> The monthly real *exchange **rate* data pertaining to India, throughout
> the paper, is the
> inverse of the IMF index of the real effective *exchange **rate*.
> 4.
> In comparison, especially, to the second half of the 1980s.
> ------------------------------------------------------------------------
> *Page 5*
>
> 3
> February 1996, the Reserve Bank of India (RBI) has not fought shy of
> aggressively sing
> to maintain values of the *rupee* it has deemed appropriate. In response
> to intense
> downward pressure on the *Rupee*, the RBI undertook net sales of foreign
> currency of
> almost U.S.$ 1.7 billion during this period, along with complementary
> measures such as
> withdrawal of liquidity from the money market.
> 5
> .
> Similarly, over the first half of 1997, the RBI
> bought more than U.S.$5 billion to prevent the *Rupee's* nominal
> appreciation. Implicit in
> such aggressive defense is a target *exchange **rate* held "correct" by
> the monetary
> authorities. This policy commitment on part of RBI is also stated
> explicitly in its 1995/96
> Annual Report as "(T)he broad objective of the *exchange **rate* policy
> will be to ensure a
> reasonably stable real effective *exchange **rate*".
> 6
> .
> 7
> .
> Despite governments' efforts at targeting the RER, it is also true that
> the RER is not
> a policy tool in the long run (Edwards (1995)). In particular, nominal
> devaluations /per se/
> cannot alter the long run behaviour of the RER in the neoclassical
> framework. Examining
> the behaviour of real *exchange* rates in the aftermath of 29
> devaluation episodes, Edwards
> (1989) finds that there are significant real effects one year after
> devaluation but these
> effects erode completely beyond the third year. Thus, targeting of the
> RER is only possible
> in the short to medium term, and the deviations from long run
> equilibrium have
> macroeconomic costs. In the long run, the RER depends upon real and
> financial
> fundamentals of the economy including government fiscal variables,
> levels of capital stock,
> total factor productivity, etc.
> In this paper, we analyse both these issues related to the RER behaviour
> in the
> Indian context. Specifically, the analysis focuses on two primary
> questions: (i) what are the
> long run determinants of the RER? That is, what structural variables
> predicted by theory
> display a stable long-run relationship with the RER in India? And, (ii)
> what are the
> macroeconomic implications of RER targeting? As discussed later, RER
> targeting in the
> short run can lead to substantial increases in the *rate* of inflation
> or the real interest rates in
> the economy. The extent to which this is borne out by the Indian
> experience is evaluated
> empirically in this paper.
> 5.
> RBI Annual Report 1995/96, p. 86.
> 6.
> Op. cit., p. 86.
> 7.
> Targeting the RER would also imply that inflation differentials between
> the domestic
> and world economy would precede changes in the nominal *exchange* rates.
> Consequently, for India we evaluated the incremental predictive content
> of inflation
> differentials for *exchange **rate* changes using Granger tests of
> causality with the
> inflation level in the US as a proxy for world inflation. When the
> sample included the
> period 1963-1996, no significant evidence of Granger causality was found
> in either
> direction. For the period since 1985 only, inflation differentials show
> one-way
> Granger causality vis-=C3 -vis the nominal effective *exchange* rates at =
1%
> level of
> significance.
> ------------------------------------------------------------------------
> *Page 6*
>
> 4
> The outline of the paper is as follows. In the next section, we look at
> the short-run
> aspects of RER management and investigate the impact of RER targeting on
> the real
> interest rates and the *rate* of inflation in the economy. It is worth
> noting that the latter
> exercise is somewhat complicated by the fact that the period of
> substantial regime shift in
> policy stance covers only the previous 10 years or so. Our results
> should, in that sense, be
> viewed as preliminary in nature with the full evidence yet to be played
> out in the economy.
> In section III we look at the long-run aspects of RER behaviour in India
> by analysing the
> structural variables that display stable relationships with the RER.
> This is done by using
> cointegration analysis. Finally, section IV contains some concluding
> remarks and
> implications for policy.
> *II.*
> *Macroeconomic Impact of RER Targeting*
> Neoclassical theory suggests that, in an open economy, either the money
> supply or
> the nominal *exchange **rate* can serve as a nominal anchor. Such an
> anchor is deemed
> necessary for macroeconomic stability since, in the long run at least,
> all nominal variables
> will converge to the pre-set *rate* of growth of either the money supply
> or the *exchange **rate*.
> However, a consequence of RER targeting is that both the *exchange
> **rate* and the money
> supply become endogenous. In other words, targeting the RER establishes
> a feedback
> from domestic inflation to the nominal *exchange **rate* and, therefore,
> countries adopting
> such rules sacrifice the role of nominal *exchange **rate* (and of the
> money supply) as
> nominal anchor. An obvious question, then, is what are the inflationary
> consequences of
> RER targeting? This question is of particular concern for policy makers
> in India given the
> polity's low tolerance for price increases, and it constitutes the focus
> of the analysis in this
> section.
> A number of recent studies have analysed the inflationary consequences
> of RER
> targeting. Lizondo (1993), for example, uses a model with both domestic
> and foreign
> financial assets to show RER targeting leads to higher inflation since
> domestic inflation and
> the RER are linked through seigniorage or the inflation tax.
> 8
> .
> Specifically, the demand for
> non-traded goods depends positively on the real *exchange **rate*
> (defined as the price of
> traded goods to non-traded goods) and real private wealth. Real private
> wealth, in turn,
> depends negatively on revenues from the inflation tax. The higher the
> inflation tax
> payments, the lower is the private sector demand for nontradables, and
> thus the higher is
> the real *exchange **rate* that equilibrates the nontradables market.
> Hence, equilibrium in the
> nontradables market requires that the steady-state inflation *rate* be
> that which generates,
> through its impact on inflation tax revenues, a level of real private
> wealth which is
> consistent with the targeted real *exchange **rate*. Thus, attaining a
> more depreciated RER
> requires higher inflation tax payments, which in turn implies a higher
> *rate* of inflation.
> 9
> .
> 8.
> See also Montiel and Ostry (1991).
> 9.
> Implicit is the assumption that inflation elasticity of money demand is
> less than one
> (i.e., higher inflation implies greater inflation tax revenues), and
> that the seigniorage
> revenues are spent by the government on tradables goods.
> ------------------------------------------------------------------------
> *Page 7*
>
> 5
> If there is no capital mobility, it can also be shown using the same
> framework that a
> temporary depreciation of the currency can be achieved without
> significantly affecting the
> inflation *rate*, but instead resulting in higher interest rates. Thus,
> for example, the targeting
> of a more depreciated real *exchange **rate* will require, for
> equilibrium in the nontradables
> market, a one-time increase in the price level with a concomitant
> decrease in household
> wealth. Subsequently, the ensuing current account surplus would be
> sterilised by the
> monetary authority by offsetting decreases in net domestic assets (i.e.,
> sale of government
> bonds). This would result in higher rates of interest which would also
> mitigate the incipient
> excess demand pressures in the nontradables market.
> 10
> .
> An alternative mechanism is shown by Calvo et. al. (1995) to also lead
> to higher
> inflation in response to RER targeting. In particular, inflation affects
> the relative price of
> intertemporal consumption through changes in the nominal *rate* of
> interest. The nominal
> interest *rate* affects the price of consumption since money is required
> to buy goods. Hence,
> if inflation and thus the nominal *rate* of interest, are expected to be
> lower in future than
> today, the consumption of traded goods falls relative to the future.
> Since consumption of
> non-traded goods cannot change, because their output is assumed
> constant, the *exchange*
> *rate* depreciates to accommodate the lower consumption of traded goods.
> Therefore,
> targeting a more depreciated RER requires that inflation be higher today
> than in the future.
> The main empirical implications of these theoretical models are twofold.
> First, since
> the impact of policy makers on the RER is only transitory, the behaviour
> of the RER will be
> characterised by temporary shocks that represent, /inter alia/, attempts
> at targeting.
> 11
> .
> Second, if there is some degree of capital mobility in the economy,
> inflation will accelerate
> during periods in which the RER is depreciated relative to its permanent
> `steady-state'
> level. Otherwise, if there is no capital mobility, the impact will be on
> the real interest rates
> instead.
> Although officially India, until recently, had a completely closed
> capital account, and
> even now it is only partially open, some capital flows have always taken
> place through the
> curb (informal or black) market. This is partially borne out by the
> difference in the value of
> the *Rupee* between the curb *rate* and the official *rate*. Some
> evidence for these *rate*
> differentials is provided in Table 3 where it can be seen that the
> premium in the curb market
> during some years was as high as 50 percent. However, the transactions
> in the parallel
> market need not only represent arbitrage between the domestic and
> international financial
> 10.
> Note that household consumption in these models depends upon disposable
> income, interest *rate* and household wealth. The transmission mechanism
> described here is a modified version of that in Montiel and Ostry (1992) =
who
> postulate interest parity even in the absence of capital mobility and
> focus instead on
> parallel *exchange* rates.
> 11.
> Note that the RER can also be affected by other types of temporary
> shocks in the
> economy.
> ------------------------------------------------------------------------
> *Page 8*
>
> 6
> markets; it is widely believed that they also include repatriation of
> cash income and profit to
> evade taxes. The specific extent to which capital is mobile in practice
> in the Indian case is,
> therefore, an empirical issue.
> Before undertaking the empirical analysis below, we check the time-series
> properties of the RER and inflation over the period 1980-1996. The
> results are presented
> in Table 4 and show that the RER, as expected, has one unit root.
> 12
> .
> The *rate* of inflation,
> on the other hand, is a stationary variable with no deterministic trend,
> i.e., it is level
> stationary.
> *II.1*
> *Relative Magnitude of Temporary Shocks to the RER*
> Using monthly data for the period 1980-1996, we use Cochrane's (1988)
> methodology to determine the relative importance of temporary and
> permanent shocks to
> the RER in India. This technique provides a measure of the persistence
> of shocks to a
> variable by examining the variance of its long differences. In
> particular, suppose that a
> variable y can be represented in the following manner:
> Y
> t
> =3D =C2=B5Y
> t-1
> + u
> t
> , where u
> t
> N(0,=C3=A8
> 2
> ).
> (4.1)
> Now if Y follows a pure random walk, then =C2=B5 =3D 1 and the variance o=
f its
> n-differences grows
> linearly with the difference, i.e.,:
> var(Y
> t
> - Y
> t-n
> ) =3D n=C3=A8
> 2
> .
> (4.2)
> If =C2=B5 < 1 and Y is a stationary process, the variance of its
> n-differences is given by:
> var(Y
> t
> - Y
> t-n
> ) =3D =C3=A8
> 2
> (1-=C2=B5
> 2n
> )/(1-=C2=B5
> 2
> ).
> (4.3)
> The ratio (1/n)var(Y
> t
> - Y
> t-n
> )/var(Y
> t
> - Y
> t-1
> ) is equal to one if Y follows a random walk process
> and converges to zero if Y is stationary. If Y has both permanent and
> temporary
> components, the ratio will converge to the ratio of the variance of the
> permanent shock to
> the total variance of Y. Consequently, the closer that ratio is to
> unity, the lower is the
> relative importance of temporary shocks.
> Table 5 summarises the findings of the application of the Cochrane
> procedure to the
> monthly RER series. It is found that temporary shocks are important in
> explaining the
> variance of the RER; they explain close to 30 percent of the variance.
> Therefore, we may
> safely conclude that temporary shocks play an important role in the
> behaviour of the RER in
> India. Note again that this methodology does not allow discriminating
> between the sources
> 12.
> The tests, which are explained in detail at the bottom of Table 4, are
> due to
> Kwiatkowski, Phillips, Schimdt and Shin (1992) and Phillips and Perron
> (1988). The
> former has stationarity as the null and the latter has a unit root as
> its null.
> ------------------------------------------------------------------------
> *Page 9*
>
> 7
> of these shocks. Consequently, not all of these temporary shocks can be
> attributed to
> `temporary policy shocks' such as devaluations; other shocks, such as to
> the terms of trade,
> for example, could also lead to temporary movements in the RER away from
> its permanent
> trend component.
> *II.2*
> *RER Targeting and *Rate* of Inflation*
> We use two methods to assess the proposition that inflation will
> accelerate when the
> authorities attempt to depreciate the real *exchange **rate* beyond its
> equilibrium level. In the
> first case, we test whether nominal devaluations used by authorities
> translate into changes
> in prices in the economy, i.e., the *exchange **rate* `pass through'
> into domestic inflation. A
> positive finding, namely that there is significant *exchange **rate*
> pass through would not allow
> much direct inference about the impact of real *exchange **rate*
> targeting on inflation.
> However, a finding that *exchange **rate* changes do not significantly
> affect the *rate* of
> inflation in the economy would suggest the likelihood that RER targeting
> may not be
> inflationary. As shown in the estimated regression below, this is indeed
> the case for our
> sample.
> Pass-through Regressions of Inflation on Devaluation
> =C3=B0 =3D
> 0.02
> *
> + 0.07 =C3~De - 0.01 =C3~De
> -1
> + 0.07 =C3~De
> -2
> (4.72) (1.21) (-0.11) (1.1)
> R
> 2
> =3D 0.04 DW =3D 1.88
> and,
> =C3=B0 =3D0.02
> *
> + 0.09
> **
> =C3~De - 0.03 =C3~De
> -1
> + 0.09
> **
> =C3~De
> -2
> - 0.001 =C3~De
> -3
> + 0.12 =C3=B0
> -1
> -
> (4.4) (1.69) (-0.67) (1.75) (-0.02) (0.96)
> 0.49
> *
> =C3=B0
> -2
> + 0.03 =C3=B0
> -3
> (-4.54) (0.31)
> R
> 2
> =3D 0.32 DW =3D 1.91,
> ------------------------------------------------------------------------
> *Page 10*
>
> 8
> where =C3=B0=3D *rate* of inflation; =C3~De=3D*rate* of depreciation; and=
figures in
> parentheses are t-
> statistics.
> *
> Significant at 1% level of significance
> **
> Significant at 10% level of significance
> The first equation above shows the results of regressing inflation only
> on the current
> and lagged values of nominal *exchange **rate* depreciation. Although
> there is no residual
> autocorrelation, the fit is quite poor with a low R-square and
> insignificant coefficients. In the
> second equation, we also include lagged values of inflation as
> explanatory variables. The
> result is a higher R-square and somewhat greater statistical
> significance of the coefficients
> of *exchange **rate* depreciation. However, while lagged inflation is
> significant at 1% level of
> significance, the coefficients of depreciation are barely significant at
> the 10% level. These
> results are qualitatively similar for alternative specifications using
> different lag lengths for
> the right hand side variables and show that nominal depreciation has had
> little to no impact
> on the *rate* of inflation in India during the past 15 years.
> A more direct method for testing the impact of RER targeting on
> inflation involves a
> two-step approach used, for example, by Calvo et. al. (1995). First,
> employing the
> Beveridge-Nelson technique, the *exchange **rate* is decomposed into its
> `permanent' (or
> steady-state) component and `temporary' (or cyclical component).
> 13
> .
> The identifying
> criterion for this technique is that the former captures the
> nonstationary component of the
> variable, while the latter captures its stationary element. Second, we
> examine the pairwise
> correlations between the cyclical component of the real *exchange
> **rate* and inflation (which
> was also shown to be a stationary variable).
> Since the inverse of the IMF index of the real *exchange **rate* is used
> here, an
> increase in the index denotes a real /depreciation/. Thus, when the
> cyclical component is
> negative, the actual *exchange **rate* is `overvalued' relative to its
> equilibrium steady-state
> level. Therefore, we should observe a positive correlation between
> inflation and the
> cyclical or temporary component of the real *exchange **rate*. Table 6
> presents estimated
> correlations between inflation and the RER, as well as its cyclical
> components. For the full
> sample, covering 1980-1996, inflation is positively correlated with both
> the RER and its
> cyclical component. The correlation, however, is significant only at 10%
> level of
> significance and is completely insignificant if we look at the period
> prior to the liberalisation
> 13.
> The trend-cycle decomposition of the RER was obtained using the
> Beveridge and
> Nelson (1981) technique as modified by Cuddington and Winters (1987). Aft=
er
> appropriate differencing, the best fit for the monthly RER series was
> obtained from
> an ARMA (0,1) process.
> ------------------------------------------------------------------------
> *Page 11*
>
> 9
> reforms in the economy. These results are consistent with those of the
> pass-through
> regressions reported above. In contrast, however, the gradual opening up
> of the economy
> seems to have been accompanied by a greater correlation between
> inflation and the
> cyclical component of RER: for the post-reform period, the correlation
> is somewhat higher
> and significant at the 1% level of significance.
> Overall, therefore, the results suggest a relatively benign trade-off
> between
> *exchange **rate* targeting and domestic inflationary pressures at least
> over the pre-reform
> period. Combined with the earlier finding, that temporary shocks are
> important in
> explaining variability of the RER, we may safely conclude that India has
> had modest
> success in RER targeting, although this may be increasingly more
> difficult as the reforms
> proceed and the economy continues to open up. These findings also
> suggest that the
> official controls on capital flows have been relatively successful in
> preventing such flows in
> practice. Another reason why RER targeting has been successful vis-=C3 -v=
is
> inflation lies in
> the fact that the nominal depreciations needed for the purpose of RER
> targeting have been
> relatively small since the underlying inflation *rate* in India has been
> low in comparison with
> many other developing countries. Futhermore, the recourse to running the
> printing presses
> for residual financing of the fiscal deficit has been modest in India in
> comparison to, say,
> some Latin American countries, which also happen to actively pursue a
> policy of
> maintaining PPP by continually changing their nominal *exchange* to
> correct for higher
> inflation.
> ------------------------------------------------------------------------
> *Page 12*
>
> 10
> *II.3*
> *RER Targeting and Real *Rate* of Interest*
> Given lack of major impact on inflation in India, has targeting the RER
> affected the
> real rates of interest instead? The theoretical framework discussed
> earlier suggests that,
> absent high capital mobility, real interest rates would increase if the
> RER is depreciated
> aggressively. This is indeed the case in India for the period since
> 1992, as reported in
> Table 7. It is found that the correlation between the cyclical component
> of the real effective
> *exchange **rate* and the real interest *rate* is reasonably high at 0.36.
> 14
> .
> Since the sample is
> too small to determine whether or not the real rates of interest display
> a unit root, Table 7
> presents correlation of temporary component of RER with both the level
> of real interest *rate*
> as well as its deviations from a deterministic trend. The latter is also
> found to be quite high
> at 0.40; both correlations are significant at 1% level of significance.
> In sum, therefore, as would be expected in a relatively closed economy,
> the impact
> of RER targeting has been less on inflation and more on the real rates
> of interest. In
> evaluating the impact of RER on real interest rates, the period since
> 1992 was used
> because it coincided with the onset of financial liberalisation,
> including a gradual freeing up
> of the interest-*rate* structure. Prior to that period, most interest
> rates in the economy were
> regulated and not market determined. As India moves closer to completely
> market-
> determined interest rates, the impact of RER targeting on the real
> interest rates is likely to
> be even higher.
> *III.*
> *Long-Run Behaviour of RER: A Cointegration Analysis*
> As noted earlier, the RER is not a policy tool in the long run
> notwithstanding
> government efforts at targeting; nominal devaluations /per se /cannot
> alter the RER over the
> long run. Theoretically, the RER at any point in time depends upon a
> number of
> fundamental and policy variables as evident from the numerous models of R=
ER
> determination in the literature.
> 15
> .
> Thus, determining the relevant set of economic variables
> that underlie the RER behaviour remains an empirical issue. This
> section, consequently,
> investigates the long-run determinants of the RER in India.
> 16
> .
> In the absence of large scale capital flows, as in India with her
> relatively closed
> capital account, the focus of models of RER determinants is in the goods
> market. The
> models typically specify the Salter-Swan framework with tradables and
> non-tradables
> sectors in the economy. The supply in the non-tradables sector is fixed
> by the assumption
> of full employment and the real *exchange **rate*, given by the ratio of
> price of tradables to
> non-tradables, is determined by the non-tradables' price clearing that
> market. A number of
> variables suggested by these theoretical models are considered in the
> empirical analysis
> below. These are:
> 14.
> The interest *rate* we use is the inter-bank call money *rate*.
> 15.
> See, for example, Edwards (1989), and Faruqee (1995).
> 16.
> The trade weighted real effective *exchange **rate* index compiled by
> the Reserve
> Bank of India is used in the empirical analysis.
> ------------------------------------------------------------------------
> *Page 13*
>
> 11
> (i) /Investment/GDP ratio (I/GDP)/: If more investment goes into the
> non-tradables sector,
> such as the high proportion of public investment in India, then
> increases in I/GDP would
> lead to greater supply of non-tradables, implying a lower price of
> non-tradables and a RER
> depreciation.
> (ii) /Seigniorage/GDP ratio (Sgn/GDP)/: In the simplest case, an
> increase in seigniorage
> leads to higher domestic inflation and, ceteris paribus, a RER
> appreciation, especially if
> government revenues are spent on nontradables. However, other models
> suggest that an
> increase in seigniorage would lead to lower household wealth, implying a
> lower demand for
> nontradables and thus an RER depreciation. Implicit in this argument is
> the assumption
> that the government does not return the inflation-tax revenue as lump
> sum transfers to
> households and, instead, spends the revenue on tradable goods.
> (iii) /Terms of trade (TOT)/: TOT, defined as the ratio of unit value of
> imports to the unit value
> of exports, have an inverse relationship with the RER. An adverse shock
> to the TOT,
> raising the prices of imports, for example, leads to a depreciation of
> the RER. Most
> traditional models emphasise the income effect generated by the change
> in the external
> terms of trade. A deterioration in the TOT reduces real income and
> results in a decline in
> the demand for nontradable goods. Therefore, to restore equilibrium the
> relative price of
> nontradables has to decline (i.e., there has to be an equilibrium real
> depreciation).
> (iv) /Fiscal deficit/GDP ratio (Def/GDP)/: A higher fiscal deficit is
> associated with greater
> spending on non-tradables, which therefore leads to RER appreciation.
> (v) /Capital inflows (Cap/GDP)/: Greater capital inflows lead to
> appreciation of the RER due
> to greater demand in the market for non-tradables.
> (vi) /Tariffs/: An increase in tariff is usually found to result in an
> appreciation of the real
> *exchange **rate*. If exportable goods, importable goods and nontradable
> goods are
> substitutes /everywhere /in demand (a sufficient condition), an increase
> in tariff will increase
> the demand for nontradable goods.
> 17
> .
> The traditionally accepted view has been that a
> reduction in tariffs in a small country will require a real depreciation
> to maintain external
> balance. A lower tariff will reduce the domestic price of importables,
> and consequently
> increase the demand for imports, which will, in turn, generate an
> external imbalance. Now
> assuming that the Marshall-Lerner conditions hold, this will require a
> real devaluation to
> restore equilibrium.
> 17.
> If, on the other hand, there is complementarity in consumption, it is
> possible that
> either an imposition of, or an increase in, tariffs will generate a real
> equilibrium
> depreciation.
> ------------------------------------------------------------------------
> *Page 14*
>
> 12
> Since the central consideration in the present exercise involves
> identification and
> estimation of the long-run relationship between the RER and its
> fundamental determinants,
> a natural conceptual framework is provided by cointegration analysis. As
> a matter of
> definition, a set of N difference-stationary variables is said to be
> cointegrated if there exists
> at least one linear combination of these variables that is stationary.
> The stationary linear
> combination is called the cointegrating vector and defines their
> long-run relationship.
> Intuitively, cointegrated variables may drift apart temporarily but must
> converge
> systematically over time. Thus, the real *exchange **rate* may be
> subject to numerous
> temporary shocks but its behaviour in the long-run would be
> systematically related to these
> fundamentals.
> In the analysis below, we deploy a two-step procedure for testing for
> the existence of
> cointegrated relationships. As first step, we check the order of
> integration of the variables
> and present the results in Table 8. The RER, the seigniorage-GDP ratio,
> the investment-
> GDP ratio, the implied tariff level, the TOT and foreign capital
> flow-GDP ratio are broadly
> found to be all I(1) variables, i.e., they are difference stationary. In
> the second stage we
> determine whether the above variables are related by one or more common
> cointegrating
> vectors.
> 18
> .
> It is found that for the full small sample period (1960/61-1995/96)
> there is one
> common cointegrating vector (in logarithmic form) that relates RER, the
> seigniorage-GDP
> ratio (Sgn/GDP), the investment-GDP ratio (I/GDP), implied tariff level,
> the terms of trade
> (TOT) and foreign capital inflow-GDP ratio (Cap/GDP).
> 19
> .
> We failed to obtain a common
> cointegrating vector when the fiscal deficit-GDP ratio was included.
> Table 9 reports the
> standardised eigenvectors and adjustment coefficients, denoted by,
> respectively =C3=A2 and =C3=A1
> in the usual notation. The first column of =C3=A2 is the estimated
> cointegrating vector, which can
> be written in the following form:
> RER =3D =C3=A3
> 0
> - 1.42 I/GDP - 0.71 Sgn/GDP - 1.09 TOT
> + 1.09 Tariff + 10.86 Cap/GDP.
> 18.
> The procedure put forward by Johansen (1988) and Johansen and Juselius
> (1990)
> is used.
> 19.
> Since inflows were negative in some years, we could not take the log of
> cap/gdp.
> Note that, although not reported, cointegration tests with productivity
> as one of the
> variables were also undertaken and showed the existence of a
> cointegrating vector.
> However, productivity data for India is available for a much shorter
> period (1973/74-
> 1992/93), than covered in the results reported here.
> ------------------------------------------------------------------------
> *Page 15*
>
> 13
> All coefficients have their anticipated (or at least plausible) signs.
> The RER
> appreciates with an increase in capital inflows and an increase in
> protection. On the other
> hand, it depreciates due to an increase in the investment-GDP ratio, an
> increase in
> seigniorage and a worsening in the terms of trade. The coefficients in
> the first column of =C3=A1
> in Table 9 measure the feedback effect of the (lagged) disequilibrium in
> the cointegrating
> relation onto the variables in the vector autoregression. In particular,
> 0.05 is the estimated
> feedback coefficient for the (log of the) RER equation. The numerical
> value seems to imply
> slow adjustment to remaining disequilibrium in the system.
> *IV.*
> *Concluding Remarks*
> This paper has investigated the evolving links between *exchange **rate*
> policies and
> domestic financial variables in India, an economy undertaking cautious
> liberalisation of its
> financial and external sectors. It also considers long-run determinants
> of real *exchange*
> rates in India where a primary finding is that several macroeconomic
> variables seem to
> impinge on the RER through the period 1960/61-1995/96. In particular,
> the results indicate
> the importance of capital flows and trade protection in causing an
> appreciation of the
> equilibrium RER should not be overlooked. On the other hand, as the
> investment ratio
> rises in the years to come as a consequence of the reforms that are
> being introduced, the
> RER should depreciate.
> The analysis in the paper shows that real *exchange* targeting has more
> than a
> transitory effect in case of India. In particular, inflation has not
> accelerated when nominal
> devaluations are used as a policy tool to enhance competitiveness of
> domestic exporters.
> Consequently, unlike in many Latin American countries, RER targeting has
> been relatively
> successful in India without substantial costs in terms of higher
> inflation. However, the
> relatively benign trade-off between RER targeting and inflation may
> deteriorate as reforms
> lead to greater degree of capital mobility. Furthermore, in the past
> three years or so, the
> economy has had to endure higher real interest rates at least partly as
> a consequence of
> RER targeting. The main point is that RER targeting does have costs in
> terms of less than
> desirable implications for the economy as a whole and that these need to
> be kept in mind
> when deciding to what extent should central bank-led devaluations /per
> se /be deployed.
> ------------------------------------------------------------------------
> *Page 16*
>
> 14
> In highlighting the growing links between *exchange **rate* policies and
> domestic
> financial variables, the paper has focused on an issue that has not
> attracted attention
> before in the Indian context but which is likely to acquire increasing
> policy significance in
> the near future. For most of its *history* India has, at least
> officially, maintained a closed
> capital account. More recently, as part of the on-going reforms, the
> capital account has
> been partially opened up for two classes of investors, namely foreign
> institutional investors
> (FIIs) and non-resident Indians (NRIs), and currently plans have been
> drawn up to achieve
> full convertibility of the Indian *Rupee* in three years. As shown by
> the results in the paper, it
> cannot be guaranteed that policy induced changes in the nominal
> *exchange **rate* will be as
> beneficial for the purpose of RER targeting in the new environment. A
> more sustainable
> policy would be to have a multi-pronged approach based on the structural
> determinants of
> equilibrium RERs, which include the relative openness of the trade
> regime, investment *rate*,
> the government's fiscal stance and productivity.
> ------------------------------------------------------------------------
> *Page 17*
>
> 15
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> /(MIT Press,
> Cambridge, MA).
> Edwards, S., 1995, Comment in /Brookings Papers on Economic Activity/,
> 2, 277.
> Faruqee, H., 1995, "Long-run determinants of the real *exchange
> **rate*", /IMF Staff Papers/,
> 42, 1, 80-107.
> Johansen, S., 1988, "Statistical analysis of cointegrating vectors",
> /Journal of Economic/
> /Dynamics and Control/, 12, 231-254.
> ------------------------------------------------------------------------
> *Page 18*
>
> 16
> Johansen, S. and K. Juselius, 1990, "Maximum likelihood estimation and
> inference on
> cointegration - with applications to the demand for money", /Oxford
> Bulletin of Economics/
> /and Statistics/, 52, 169-210.
> Kwiatkowski, D., P.C.B. Phillips, P. Schmidt and Y. Shin, 1992, "Testing
> the null hypothesis
> of stationarity against the alternative of a unit root: How sure are we
> that economic time
> series have a unit root?", /Journal of Econometrics/, 54, 159-178.
> Lizondo, J.S., 1993, "Real *exchange **rate* targeting under imperfect
> asset substitutability",
> /IMF Staff Papers/, 40, 829-850.
> Montiel, P.J. and J. Ostry, 1991, "Macroeconomic implications of real
> *exchange **rate*
> targeting in developing countries", /IMF Staff Papers/, 38, 872-900.
> Montiel, P.J. and J. Ostry, 1992, "Real *exchange **rate* targeting
> under capital controls: Can
> money provide a nominal anchor?", /IMF Staff Papers/, 39, 58-78.
> Patel, U.R. and P. Srivastava, 1997, "The real *exchange **rate* in
> India: Determinants and
> targeting", Center for Economic Performance (London School of Economics)
> Working
> paper No. 323, January.
> Phillips, P.C.B. and Pierre Perron, 1988, "Testing for a unit root in
> time series regression",
> /Biometrica/, 75, No. 2, pp. 335-346.
> *Table 1*
> *Deviation of nominal *exchange* rates from PPP *exchange* rates for*
> *Indonesia, Korea, China and Malaysia*
> *a.*
> (in percent)
> *Year*
> *Indonesia*
> *Korea*
> *China*
> *Malaysia*
> 1981
> 1.8
> 11.5
> -6.5
> -0.6
> 1982
> 5.1
> 12.5
> -9.9
> -1.0
> 1983
> 11.8
> 13.0
> -10.9
> -0.4
> 1984
> 18.5
> 10.8
> -11.9
> -0.7
> ------------------------------------------------------------------------
> *Page 19*
>
> 17
> 1985
> 19.9
> 9.6
> -5.1
> -3.9
> 1986
> 23.3
> 10.6
> -0.6
> -4.9
> 1987
> 30.4
> 9.8
> 4.6
> -8.2
> 1988
> 35.5
> 13.9
> 25.7
> -9.4
> 1989
> 37.7
> 14.9
> 38.1
> -11.3
> 1990
> 47.6
> 18.5
> 33.4
> -13.6
> 1991
> 55.3
> 24.5
> 34.5
> -13.4
> 1992
> 62.4
> 28.4
> 41.9
> -12.0
> 1993
> 73.6
> 30.8
> 60.3
> -11.4
> 1994
> 84.2
> 36.0
> 88.4
> -10.3
> 1995
> 96.6
> 38.3
> 119.8
> -8.1
> 1996
> 110.6
> 41.3
> 133.1
> -7.2
> *a.*
> Plus sign indicates domestic currency is undervalued.
> ------------------------------------------------------------------------
> *Page 20*
>
> 18
> *Table 2*
> *Deviation of nominal *Rupee*-U.S. Dollar *exchange **rate* from PPP
> *exchange **rate**
> *b.*
> (in percent)
> *Year*
> *Deviation*
> 1981/82
> 0.7
> 1982/83
> -2.1
> 1983/84
> 3.1
> 1984/85
> 5.7
> 1985/86
> 8.1
> 1986/87
> 10.8
> 1987/88
> 15.6
> 1988/89
> 19.2
> 1989/90
> 22.1
> 1990/91
> 28.9
> 1991/92
> 38.7
> 1992/93
> 47.9
> 1993/94
> 57.2
> 1994/95
> 71.6
> 1995/96
> 79.8
> 1996/97
> 86.7
> *b.*
> Plus sign indicates domestic currency is undervalued.
> ------------------------------------------------------------------------
> *Page 21*
>
> 19
> *Table 3*
> *Black Market Premium, Indian *Rupee*-U.S. Dollar *Exchange **Rate**
> *c.*
> *Year*
> **Rupee*-*
> *U.S.$*
> *Ex. *Rate**
> *Black Market*
> *U.S.$*
> *Ex. *Rate**
> *Black Market*
> *Premium*
> *(in percent)*
> 1963/64
> 4.8
> 6.8
> 41.8
> 1969/70
> 7.5
> 11.5
> 53.3
> 1971/72
> 7.5
> 7.3
> -2.9
> 1973/74
> 7.4
> 9.3
> 24.9
> 1979/80
> 8.1
> 8.8
> 8.2
> 1980/81
> 7.9
> 8.5
> 7.5
> 1981/82
> 9.0
> 11.0
> 22.7
> 1982/83
> 9.7
> 12.0
> 24.1
> 1985/86
> 12.2
> 13.1
> 7.1
> 1991/92
> 24.5
> 26.5
> 8.3
> 1993/94
> 31.4
> 34.5
> 10.0
> 1994/95
> 31.4
> 34.5
> 10.0
> 1995/96
> 33.4
> 36.4
> 9.0
> *c.*
> The black market *exchange **rate* is available for certain days only;
> therefore, the figures in
> the first column of the table should only be taken as indicative. The
> data has been collected
> and kindly made available to us by the archives section of *Vyapar
> *newspaper published in
> Bombay.
> ------------------------------------------------------------------------
> *Page 22*
>
> 20
> *Table 4*
> *Unit root tests: 1980:1-1996:12*
> *Series*
> *Z( )*
> *Z(t )*
> *Z(*
> *3*
> *)*
> /*Real *exchange **rate**/
> Level
> 6.638
> 1.261
> -7.95
> -2.56
> 4.01
> First difference
> 0.329
> 0.261
> -152.80
> -11.27
> 63.20
> /*Inflation*/
> 0.208
> 0.109
> -114.1
> -8.94
> 40.21
> *Critical values (95%)*
> *0.463*
> *0.146*
> *-25.1*
> *-3.66*
> *7.16*
> /*Note:*/
> (i) The two KPSS statistics, =C3=A7
> =C3=AC
> and =C3=A7
> =C3=B4
> , are based on the following:
> Y
> t
> =3D =C3(r)t + =C3~C
> t
> + =C3=A5
> t
> where
> =C3~C
> t
> =3D =C3~C
> t-1
> + u
> t
> ;
> u
> t
> i.i.d.(0, =C3=B3
> u
> 2
> )
> where Y
> t
> is modeled as the sum of a deterministic trend, a random walk and a
> stationary
> error, =C3=A5
> t
> ; the initial value of =C3~C
> t
> is treated as fixed and serves the role of an intercept. To test
> for level stationarity instead of trend stationarity (=C3=A7
> =C3=B4
> ) , =C3(r) is set equal to zero and the
> residuals are from a regression of Y on only the intercept. This
> statistic is denoted by =C3=A7
> =C3=AC
> .
> Kwiatkowski, Phillips, Schmidt and Shin (1992) provide critical values
> for tests of both level
> and trend stationarity.
> (ii) The Phillips-Perron statistics, Z(=C3=A2), Z(t
> =C3=A2
> ), Z(=C3-
> 3
> ), are based on:
> Y
> t
> =3D =C3=A1
> 0
> + =C3=A1
> 1
> t + =C3=A2(L)Y
> t-1
> + u
> t
> .
> ------------------------------------------------------------------------
> *Page 23*
>
> 21
> These are derived in Phillips and Perron (1988) for the null that =C3=A2=
=3D1 and =C3=A1
> 1
> =3D0. Z(t
> =C3=A2
> ) makes
> use of the t-statistic on =C3=A2, t
> =C3=A2
> (for =C3=A2=3D1), and Z(=C3-
> 3
> ) is the regression F-test of Dickey and Fuller
> (1981).
> ------------------------------------------------------------------------
> *Page 24*
>
> 22
> *Table 5*
> *Temporary and random walk components of the real *exchange **rate**
> *1980:1-1996:12*
> (1/n) =C3=A8
> n
> 2
> /=C3=A8
> 1
> 2
> for various n (where n are months)
> 24
> 48
> 72
> 96
> 1.673
> 1.504
> 0.863
> 0.733
> *_______________________________________
_________________________________=
____________________*
> *Table 6*
> *Pairwise Correlations: Inflation and Real *Exchange **Rate**
> *d.*
> *Full*
> *Sample*
> *Pre-*
> *Reform*
> *Post-*
> *Reform*
> /*Inflation*/
> Real *exchange **rate*
> 0.12
> (1.64)
> 0.13
> (1.57)
> 0.17
> (2.33)
> Cyclical component of
> the real *exchange **rate*
> 0.12
> (1.64)
> 0.13
> (1.57)
> 0.17
> (2.33)
> ------------------------------------------------------------------------
> *Page 25*
>
> 23
> *d.*
> Figures in parantheses are t values.
> ------------------------------------------------------------------------
> *Page 26*
>
> 24
> *Table 7*
> *Pairwise Correlations: Real Interest *Rate* and Real *Exchange **Rate**
> *e.*
> *Post-*
> *Reform*
> /*Real interest *rate**/
> Real *exchange **rate*
> 0.41
> (2.88)
> Cyclical component of
> the real *exchange **rate*
> 0.36
> (2.47)
> /*Cyclical component of real interest *rate**/
> Real *exchange **rate*
> 0.40
> (2.80)
> Cyclical component of
> the real *exchange **rate*
> 0.36
> (2.47)
> *e.*
> Figures in parantheses are t values.
> ------------------------------------------------------------------------
> *Page 27*
>
> 25
> *Table 8a*
> *Unit root tests (level)*
> *f.*
> *: 1960/61-1995/96*
> *Series*
> *Z( )*
> *Z(t )*
> *Z(*
> *3*
> *)*
> Real *exchange **rate*
> 1.291
> 0.187
> -10.68
> -2.40
> 2.92
> Fis.def.-GDP ratio
> 1.176
> 0.238
> -7.76
> -2.21
> 2.29
> Inv.-GDP ratio
> 1.181
> 0.083
> -17.86
> -3.27
> 5.22
> Seigniorage-GDP ratio
> 1.146
> 0.041
> -37.61
> -7.25
> 18.73
> Implied tariff
> 0.821
> 0.072
> -11.85
> -2.55
> 3.71
> Terms of trade
> 0.255
> 0.190
> -5.38
> -0.92
> 1.63
> Capital flows/GDP
> 0.409
> 0.340
> -16.66
> -3.28
> 5.29
> Critical values (95%)
> 0.463
> 0.146
> -25.1
> -3.66
> 7.16
> *Table 8b*
> *Unit root tests (first difference): 1960/61-1995/96*
> *Series*
> *Z( )*
> *Z(t )*
> *Z(*
> *3*
> *)*
> Real *exchange **rate*
> 0.075
> 0.054
> -30.86
> -5.56
> 13.28
> Fis.def.-GDP ratio
> 0.121
> 0.084
> -37.35
> -6.69
> 19.46
> Inv.-GDP ratio
> 0.059
> 0.052
> -40.09
> -7.58
> 23.42
> Seigniorage-GDP ratio
> 0.032
> 0.025
> -49.98
> -16.38
> 50.90
> Implied tariff
> 0.099
> 0.057
> -27.44
> -4.60
> 9.88
> Terms of trade
> 0.281
> 0.103
> -25.74
> -3.78
> 7.00
> Capital flows/GDP
> 0.097
> 0.048
> -42.24
> -10.20
> 27.13
> Critical values (95%)
> 0.463
> 0.146
> -25.1
> -3.66
> 7.16
> *f.*
> The two KPSS statistics, =C3=A7
> =C3=AC
> and =C3=A7
> =C3=B4
> , are explained at the bottom of Table 4.
> ------------------------------------------------------------------------
> *Page 28*
>
> 26
> *Table 9*
> *A Cointegration Analysis of the Indian RER: 1960/61-1995/96*
> *Eigenvalues Hypotheses*
> *g.*
> *=C2=BAmax*
> *95% crit. val.*
> *=C2=BAtrace*
> *95% crit. val.*
> r=3D0
> 41.4*
> 107.8*
> r=E2~I=A41
> 32.87
> 66.43
> r=E2~I=A42
> 15.36
> 33.57
> r=E2~I=A43
> 8.074
> 18.21
> r=E2~I=A44
> 6.949
> 10.13
> r=E2~I=A45
> 3.185
> 3.185
> *Standardised eigenvectors*
> RER
> 1.000
> 0.275
> 2.549
> 2.941
> 0.239
> -12.18
> inv-GDP
> 1.419
> 1.000
> -13.01
> 4.021
> -0.387
> -1.449
> TOT
> 1.094
> 0.491
> 1.000
> -1.124
> -0.036
> -11.11
> tariff
> -1.089
> -0.126
> 14.68
> 1.000
> -0.126
> -8.248
> cap-GDP
> -10.86
> -2.870
> -291.6
> 32.55
> 1.000
> -232.2
> sgn-GDP
> 0.7102
> -0.140
> -0.640
> 0.441
> 0.039
> 1.000
> *Standardised adjustment coefficients =C3~F*
> RER
> 0.052
> -0.018
> -0.004
> -0.034
> -0.073
> -0.001
> inv-GDP
> -0.033
> -0.543
> 0.009
> -0.025
> 0.070
> 0.000
> TOT
> -0.087
> -0.822
> -0.012
> 0.006
> -0.032
> 0.004
> tariff
> -0.029
> -0.109
> -0.009
> -0.024
> 0.351
> 0.004
> cap-GDP
> -0.007
> 0.045
> 0.001
> 0.001
> -0.005
> 0.000
> sgn-GDP
> -0.921
> 0.917
> -0.011
> -0.258
> 0.083
> 0.006
> g.
> r denotes number of cointegrating vector(s).
> *
> Null rejected at 95% level.
| |
| Straydog 2006-09-18, 6:58 pm |
| | |
|
| If the United States stopped wasting billions pretending to be
the world's police force, stopped supporting Israel, eased taxes
on productive activities and increased them on parasitic
predatory activities, and made the tax system more progressive,
then the exchange rate, growth, debt, and other economic
indicators would improve for the United States.
| |
| Day Brown 2006-09-20, 9:57 pm |
| RG wrote:
> If the United States stopped wasting billions pretending to be the
> world's police force, stopped supporting Israel, eased taxes on
> productive activities and increased them on parasitic predatory
> activities, and made the tax system more progressive, then the exchange
> rate, growth, debt, and other economic indicators would improve for the
> United States.
All right. how do you get the independents elected to congress to do that?
|
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