OPEN-ECONOMY MACROECONOMICS Open-Economy Macroeconomics
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OPEN-ECONOMY MACROECONOMICS Open-Economy Macroeconomics Proceedings ofa Conference held in Vienna by the International Economic Association Edited by Helmut Frisch Professor ofEconomics University ofTechnology. Vienna and Andreas Worgotter Chairman . Department ofEconomics Institute for Advanced Studies. Vienna Palgrave Macmillan in association with the © International Economic Association 1993 Softcoverreprint ofthe bardeover 1st edition 1993 978-0-333-57313-6 All rights reserved. For information, write: Scholarly and Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. 10010 First published in the United States of America in 1993 ISBN 978-1-349-12886-0 ISBN 978-1-349-12884-6 (eBook) DOI 10.1007/978-1-349-12884-6 Library of Congress Cataloging-in-Publication Data Open-economy macroeconomics: proceedings of a conference held in Vienna by the International Economic Association I edited by Helmut Frisch and Andreas Wörgötter. p. cm. Conference held in May/June 1991. "[Published by] St. Martin's Press, in association with the International Economic Association." ISBN 978-0-312-09015-9 I. Macroeconomics-Congresses. I. Frisch, Helmut. II. Wörgötter, Andreas. 111. International Economic Association. IV. Series. HB 172.5.064 1993 339--dc20 92-26619 CIP Contents The International Economic Association viii Acknowledgements x List of Contributors and Participants xii Abbreviations and Acronyms xvii Preface xix Introduction Helmut Frisch and Andreas Worgotter xxi PART I MONETARY POLICY IN OPEN ECONOMIES 1 Exchange-rate Based Stabilisation under Imperfect Credibility Guillermo A . Calvo and Carlos A. Vegh 3 2 Devaluation, the Terms of Trade and Investment in a Keynesian Economy Michael Gavin 29 3 Sheet Anchors, Fixed Price Anchors and Price Stability in a Monetary Union Andrew J. Hughes Hallett, David Vines and Myrvin Anthony 46 4 Foreign Supply Shocks, Wage Indexation and Optimal Monetary Policy Franz X. Hof 70 PART II DOMESTIC ADJUSTMENT TO FOREIGN SHOCKS 5 The Impact of Fiscal and Productivity Shocks on the Natural Rate of Unemployment in a Two-Country World Hian Teck Hoon and Edmund S. Phelps 95 v vi Contents 6 Shocks and Aggregate Low Frequency VariabUity in a Small Open Economy Christian C. Starck 119 7 Real Shocks and the Real Exchange Rate Emil-Maria Claassen 137 8 Economic Adjustment and Growth in Small Developing Countries DeLisle Worrell 153 PART III LABOUR AND CAPITAL MARKETS IN OPEN ECONOMIES 9 Influence of Fiscal Shocks on Exchange Rate VolatUity under Imperfect Capital MobUity and Asset SubstitutabUity Saziye Gazioglu 167 10 Domestic and Foreign Shocks to Employment and Capital Accumulation in Germany Oliver Landmann and Iiirgen Jerger 186 II Capital Taxation, Housing Investment and Wealth Accumulation in a Small Open Economy Seren B. Nielsen and Peter Birch Serensen 203 12 Underemployment EquUibria in an Empirical Macromodel for Austria Peter Neudorfer and Karl Pichelmann 224 PART IV INTERDEPENDENCE OF OPEN ECONOMIES 13 Measurement Errors and the Convergence Hypothesis Edward E. Leamer 241 14 Three Parity Conditions in International Finance Richard C. Marston 257 Contents vii IS Endogenous Growth, Convergence and Fiscal PoUcles in an Interdependent World George S. Alogoskoujis and Frederick van der Ploeg 272 16 Consistent Conjectural EquiUbria and Economic Policies Coordination Henri Sterdyniak and Pierre Villa 289 PART V BUBBLES VERSUS FUNDAMENTALS: MODELLING EXCHANGE RATE BEHAVIOUR 17 Stochastic Shocks, Fads and Exchange Rate Fundamentals: an Empirical Evaluation of the Target Zone Proposal Nicos M. Christodoulakis 313 18 The Theory of Exchange Rate Determination and Exchange Rate Forecasting Giancarlo Gandolfo, Pier Carlo Padoan and Giuseppe de Arcangelis 332 19 A Chaotic Monetary Model of the Exchange Rate Paul De Grauwe and Hans Dewachter 353 20 Theories, Consistent Expectations and Exchange Rate Dynamics Michael Goldberg and Roman Frydman 377 21 Bandwagon Effects, or Rational Expectations in the Exchange Rate? Vasumathi Vijayraghavan 400 Index of Names 409 Index of Subjects 413 The International Economic Association A non-profit organisation with purely scientific aims, the Inter national Economic Association (lEA) was founded in 1950. It is in fact a federation of national economic associations and at present includes fifty-eight such professional organisations from all parts of the world. Its basic purpose is the development of economics as an intellectual discipline. Its approach recognises a diversity of prob lems, systems and values in the world and also takes note of method ological diversities. The lEA has, since its creation, tried to fulfil that purpose by promoting mutual understanding of economists from the West and the East, as well as from the North and the South, through the organisation of scientific meetings and common research pro grammes, and by means of publications on problems of current importance. During its forty-odd years of existence, it has organised over 100 round-table conferences for specialists on topics ranging from fundamental theories to methods and tools of analysis and major problems of the present-day world. Nine triennial World Congresses have also been held, which have regularly attracted the participation of a great many economists from all over the world. The Association is governed by a Council, composed of represen tatives of all member associations, and by a fifteen-member Execu tive Committee which is elected by the Council. The Executive Committee (1989-92) is composed as follows: President: Professor Anthony B. Atkinson, UK Vice-President: Professor Luo Yuanzheng, China Treasurer : Professor Alexandre Lamfalussy, Belgium Past President : Professor Amartya Sen, India Other Members : Professor Abel Aganbegyan, Russia Professor Kenneth J. Arrow, USA Professor Edmar Lisboa Bacha, Brazil Professor P.R. Brahmananda, India Professor Wolfgang Heinrichs, Germany Professor Edmond Malinvaud, France Professor Takashi Negishi, Japan viii The International Economic Association ix Professor Don Patinkin, Israel Professor Agnar Sandmo, Norway Professor Erich Streissler, Austria Professor Stefano Zamagni, Italy Advisers: Professor Oleg T. Bogomolov, Russia Professor Karel Dyba, Czechoslovakia Professor Mohammed Germouni, Morocco Secretary-General: Professor Jean-Paul Fitoussi, France General Editor : Mr Michael Kaser, UK Adviser to General Editor : Professor Sir Austin Robinson, UK The Association has also been fortunate in having secured the following outstanding economists to serve as President: Gottfried Haberler (1950-3), Howard S. Ellis (1953-6), Erik Lindahl (1956-9), E.A.G. Robinson (1959-62), G. Ugo Papi (1962-5), Paul A. Samuelson (1965-8), Erik Lundberg (1968-71), Fritz Machlup (1971-4), Edmond Malinvaud (1974-7), Shigeto Tsuru (1977-80), Victor L. Urquidi (1980-3), Kenneth J. Arrow (1983-6), Amartya Sen (1986-9). The activities of the Association are mainly funded from the subscriptions of members and grants from a number of organisations, including continuing support from UNESCO. Acknowledgements The Vienna Conference of the lEA which took place at the Institute for Advanced Studies, Vienna, Austria, was organised by a local committee with the following members: Professor Paul De Grauwe, Katholieke Universiteit Leuven, Leuven, Belgium Professor Helmut Frisch, University of Technology, Vienna, Austria Professor Giancarlo Gandolfo , University of Rome 'La Sapienza', Rome , Italy Professor Richard C. Marston , The Wharton School, University of Pennsylvania, Philadelphia, USA Professor Erich Streissler, University of Vienna, Austria Professor Andreas Worgotter, Institute for Advanced Studies, Vienna, Austria Financial and logistic support was generously provided by local private and public foundations, as well as private firms, and we are especially grateful to: Austrian National Bank, Vienna , Austria Austria Tabakwerke AG, Vienna, Austria Assocation of Austrian Industrialists, Vienna, Austria Federal Chamber of Commerce, Vienna, Austria Casinos Austria, Vienna, Austria Chamber of Labour, Vienna, Austria Lotto-Toto Gesellschaft, Vienna, Austria Osterreichische Kontrollbank Aktiengesellschaft, Vienna, Austria Osterreichische Postsparkasse , Vienna, Austria Zentralsparkasse und Kommerzialbank Wien AG, Vienna, Austria We also wish to express our gratitude to all participants whose intellectual engagement ensured the conference's success, and whose discipline made the timely publication of the conference volume possible. We are especially grateful to Maureen Hadfield, who participated at the conference and provided the editors with the necessary support and encouragement to prepare the proceedings for publication. x Acknowledgements xi The excellent organisation of the conference by the Institute for Advanced Studies, Vienna was much appreciated by the participants, as were the hospitality and social occasions, which encouraged dis cussions to continue outside the conference venue . The local organis ing committee was happy and grateful to rely on the organisational talent and efficiency of Beatrix Krones, the conference secretary. Thanks are expressed to the International Social Science Council under whose auspices the publishing programme is carried out and to UNESCO for its financial support. List of Contributors and Participants George S. A1ogoskoufis, Birkbeck College, London and CEPR Dr Myrvin Anthony, University of Strathclyde, Glasgow, UK Professor Ljubisa Adamovic, University of Belgrade, Yugoslavia Mr Jean Bensaid, INSEE, Paris, France