INTERNATIONAL MONETARY FUND
STAFF PAPERS
CONTENTS
Inflationary Expectations, Taxes, and the Demand for Money in the United States VITO TANZI • 155 Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experienc of the Seventies DONAL J. DONOVAN • 171 Effects of Inflation Control Programs on Expected Real Interest Rates JOHN H. MAKIN • 204 An Analysis of Exchange Market Intervention of Industrial and Developing Countries MICHAEL DOOLEY • 233 Interest Rate Differentials and Exchange Risk: Recent Argentine Experience MARIO I. BLEJER • 270 The International Monetary Fund, 1980-1981: A Selected Bibliography ANNE C.M. SALDA • 281
Summaries • 352 Resumes • 355 Resumenes • 359
VOL. 29 No. 2 JUNE 1982 ©International Monetary Fund. Not for Redistribution STAFF PAPERS
NORMAN K. HUMPHREYS, Editor MARY ELLEN LUCAS, JENNIE LEE CARTER, and PAUL GLEASON Assistant Editors Editorial Committee Norman K. Humphreys, Chairman Adalbert Knobl Jacques R. Artus Anthony Lanyi Sterie T. Beza M. Ranji P. Salgado Eduard H. Brau Stephen A. Silard Deena R. Khatkhate Alan A. Tait
From the Foreword to the first issue:
"Among the responsibilities of the International Monetary Fund, as set forth in the Articles of Agreement, is the obligation to 'act as a center for the collection and exchange of information on monetary and financial problems,' and thereby to facilitate 4the preparation of studies designed to assist members in developing policies which fur- ther the purposes of the Fund.9 The publications of the Fund are one way in which this responsibility is discharged. "Through the publication of Staff Papers, the Fund is making available some of the work of members of its staff. The Fund believes that these papers will be found helpful by government officials, by pro- fessional economists, and by others concerned with monetary and financial problems. Much of what is now presented is quite provisional. On some international monetary problems, final and definitive views are scarcely to be expected in the near future, and several alternative, or even conflicting, approaches may profitably be explored. The views presented in these papers are not, therefore, to be interpreted as nec- essarily indicating the position of the Executive Board or of the offi- cials of the Fund."
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©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND STAFF PAPE RS
Vol. 29 No. 2 JUNE 1982
©International Monetary Fund. Not for Redistribution EDITOR'S NOTE The Editor invites from contributors outside the Fund brief comments (not more than 1,000 words) on pub- lished articles in Staff Papers. These comments should be addressed to the Editor, who will forward them to the author of the original article for reply. Both the com- ments and the reply will be published in the same issue of Staff Papers.
International Standard Serial Number: ISSN 0020-8027
©International Monetary Fund. Not for Redistribution Inflationary Expectations, Taxes, and the Demand for Money in the United States
VITO TANZI*
N HIS EXCELLENT ARTICLE on the demand for money, Goldfeld i cited Harry Johnson to the effect that the lack of "American evidence that the expected rate of change of prices enters the demand for money ... [was] something of a puzzle" (Goldfeld (1973), p. 608). Goldfeld described his own empirical results as "a mixed bag" (ibid., p. 613) and concluded that "even at the the- oretical level," the question of "whether inflationary expectations have an independent role to play in the demand-for-money func- tion" is controversial (ibid., p. 607). Studies dealing with devel- oping economies, however, have generally found that inflationary expectations possess more explanatory power than institutionally rigid nominal interest rates in basic money demand functions. Furthermore, some recent studies for the United States have used both inflationary expectations and the rate of interest in the demand-for-money equation. These studies have not provided sufficient theoretical justification for doing so. This paper deals with the role of inflationary expectations from a theoretical and empirical point of view. It contains four sections. Section I presents a theoretical justification for introducing infla- tionary expectations as an independent variable in the demand- for-money function. The argument is based upon the necessity of explicitly taking into account the effect of taxation on the rate of return, an effect that has been ignored by previous studies. Sec-
*Mr. Tanzi, Director of the Fiscal Affairs Department, holds a doctorate in economics from Harvard University. He was formerly a professor and Chairman of the Economics Department at American University.
155
©International Monetary Fund. Not for Redistribution 156 VITO TANZI tion II presents some simple empirical tests.1 Section III outlines an alternative model, subjects it to testing, and presents the new empirical results. Section IV draws some conclusions.
I. Theory Assume that an economy is growing at a steady pace and that the price level is not expected to change. For such an economy, it is widely agreed that the demand for money, m, can be repre- sented by the function where r and y denote, respectively, the interest rate and the income level. As the price level is constant, r and y, as well as m, represent both nominal and real values. In this case, the rate of interest reflects fully the opportunity cost of holding money. Next, assume that although the economy is still growing at a steady pace, the price level is no longer stable but instead is increasing (and is expected to continue increasing) at an annual rate TT. Does this require a modification of equation (1)? Or should TT be included among the independent variables that affect ml The basic arguments against this inclusion would seem to be two: (1) the Fisherian hypothesis about the behavior of nominal interest rates during inflationary situations, and (2) the Keynesian assumption that money as an asset is substituted only for financial assets ("bonds") and not for real assets. If R denotes the nominal interest rate and r the real rate, Fisher's hypothesis states that or, in a stricter version, which implies that r is constant and that changes in 11 are fully reflected in R. When the strict version of the Fisherian hypothesis holds, the nominal rate of interest incorporates fully the expected rate of inflation. Furthermore, if interest income is not taxed, an individual who lends money at a nominal rate R receives a real
ll shall stay within the established demand-for-money literature in order to test more accurately the main innovations in this paper. Areas of disagreement and current research effort are well surveyed in Laidler (1980).
©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 157 return equal to the real rate r, which, under the assumed condi- tions, will always be positive and constant.2 This implies that R always exceeds IT by the amount of the real rate. Therefore, financial assets that pay a nominal return equal to R will be preferred over assets that pay an implicit nominal return equal to TT. The latter can be called consumption goods and would also include durables and non-income-yielding real assets such as works of art and jewelry. In such a situation, the real rate of return on equity will, at the margin, tend to be equal to the expected real rate of interest (r = R - TT); consequently, there will not be any preference for real assets over financial assets. The demand for money will be limited to the amount needed for current trans- actions; temporary excesses over that amount would lead to the purchase of interest-bearing financial assets (bonds) or income- yielding real assets (equity) and not to increases in the holdings of "consumption goods." The reason for this is that the purchase of the latter would be associated with an opportunity cost equal to the expected real rate of interest. Furthermore, if one still fol- lowed the traditional Keynesian assumption, even the substitution between money and income-yielding real assets (equity) would not take place, so that only financial assets would be purchased. The next step toward realism requires that the existence of income taxes be recognized.3 In today's world, an individual who buys a financial asset bearing an interest rate equal to R does not retain the total interest income derived from the asset but only the portion of it that is left after paying income taxes. Assuming that an individual's marginal tax rate, expressed as a fraction, is T, his after-tax interest rate will be reduced to R r, where
If the Fisherian relationship is still assumed to hold, equa- tion (3) can be rewritten as
Obviously, the higher is 71, the lower R T will be compared with R. Consider the rate of return that an individual gets, ceteris part- bus, if, instead of buying a financial asset, he buys, first, an equity, and, second, consumption goods. As unrealized capital gains are not taxed, if this individual buys an equity for which nominal value 2However, the real rate may not, in fact, be constant (see Tanzi (1980)). 3The role that income taxes may play in the demand for money has been largely ignored (see Tanzi (1979)).
©International Monetary Fund. Not for Redistribution 158 VITO TANZI is expected to increase at the rate of TT and to pay an income (in the form of dividends, rent, etc.) equal to r, he will expect to receive a net-of-tax nominal rate of return equal to TT + r (1 - T). However, should the capital gain be realized, or should the in- vestor take into account the tax liability that he will face in the future when he sells the asset, the actual rate of return would be less than what has been shown, especially since the total nominal increase in the value of the asset would be taxable. But if the individual buys consumption goods, the value of which is assumed to increase at the rate of inflation, he will receive the full nominal rate of return equal to TT, as the nominal increase in the value of the goods is not taxable.4 In summary, assuming that the Fisherian relationship holds, when, as in the United States, there is inflation and nominal incomes are taxed, the opportunity cost of holding money for an individual taxed at marginal rate T, measured in terms of forgone nominal yield, is5 [TT (1 - T) + r (1 - T)] for financial assets, [TT + r (1 — T}] for equities with unrealized capital gains, and TT for consumption goods. If nominal capital gains from holding equities were taxed at a rate T* (where T* A vivid numerical illustration of this point is provided by Ta- 4Furthermore, even if these goods are eventually sold, with the result that some capital gain is realized, the sale does not generally create any tax liability. 5I am assuming that equities and consumption goods are affected by the same rate of inflation IT. If One were to assume differential rates, some modifications would need to be made in the analysis. ©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 159 TABLE 1. EFFECT OF TAXES ON YIELDS (In per cent) Assumed Inflation Rates After-Tax Rates of Interest T r 1Ti TT2 TT3 Ri(l - T) R2(l ~ T) #3(1 - T) 0.00 2 5 10 20 7.0 12.0 22.0 0.10 2 5 10 20 6.3 10.8 19.8 0.30 2 5 10 20 4.9 8.4 15.4 0.40 2 5 10 20 4.2 7.2 13.2 0.50 2 5 10 20 3.5 6.0 11.0 0.70 2 5 10 20 2.1 3.6 6.6 ble 1. The table assumes that the strict version of the Fisherian hypothesis holds and that the real rate of interest is constant and equal to 2. Therefore, in the absence of taxes, the nominal rate R would be equal to the inflation rate plus 2. As the average tax rate on interest income in the United States has been estimated to be around 0.40 during the past decade,6 the most significant row may be the one corresponding to T = 0.40. This row indicates that even at an inflation rate of 5 per cent, individuals subject to a marginal tax rate of 0.40 receive a mea- surably higher return from holding consumption goods than from purchasing financial assets paying 7 per cent interest. When in- flation reaches higher levels, or when the tax rate is higher, the differentials become great indeed. For example, an individual with a marginal tax rate of 50 per cent (not an unusually high rate) would receive a net-of-tax rate of return of only 6 per cent when the rate of inflation was 10 per cent and of only 11 per cent when the rate of inflation was 20 per cent. As a consequence, for many individuals, the direct substitution of consumption goods for mon- ey becomes far more attractive than the substitution of financial assets for money.7 But this implies that in the determination of the "Calculated by the author from data in U.S. Internal Revenue Service, Statis- tics of Income: Individual Income Tax Returns (Washington, various issues). 7It must, of course, be remembered that not all individuals are affected in the same way. For some, the marginal tax rate is low, so that, for them, financial assets remain more attractive than real assets. For them, the relevant oppor- tunity cost of money holding remains the rate of interest. ©International Monetary Fund. Not for Redistribution 160 VITO TANZI demand-for-money function, inflationary expectations become increasingly important compared with nominal rates of interest and cannot, therefore, be left out of the determinants of that demand. In conclusion, far from being a controversial issue, there seems to be ample theoretical justification for rewriting the demand-for- money function as with the understanding that, under inflationary conditions, y and IT will be important variables with well-specified signs (positive for y and negative for 77), while the importance of R will no longer be obvious. This conclusion implies that leaving IT out of the equation introduces an upward bias in the coefficient of R. Therefore, that coefficient should decrease when TT is added. The previous theoretical discussion has assumed that the strict version of the Fisherian hypothesis, which was stated in equa- tion (2), holds. However, in the real world, that strict version of Fisher's theory may not hold, and the market interest rate may adjust by less or more than the expected inflation rate. Theoretical8 and institutional arguments9 have been advanced to make a case that the interest rate will adjust by less than the inflation rate; and theoretical arguments have been advanced that it will adjust by more.10 There is now overwhelming empirical evidence that in the United States over the period covered by this paper (1964-78), the nominal interest rate adjusted by less than expected inflation. This implies that the relative importance of TT (compared with R) in the demand-for-money equation was even greater than has been previously described in this paper. In the post-1978 period, however, the nominal interest rate increased by more than the expected inflation rate. This implies that, in this latter period, the interest rate became more important as a deter- minant of the demand for money than it had been in the previous period. As a consequence, the conclusions reached in this paper may have to be qualified when they are applied to the post-1978 period. Elsewhere, I have argued that this recent change is due to the loss of fiscal illusion on the part of lenders.11 8See Mundell (1963) and Tobin (1965). 9See B. M. Friedman (1980) for a discussion of institutional and market factors behind less-than-complete Fisherian adjustment. 10See Darby (1975), Feldstein (1976), and Tanzi (1976). nSee Tanzi (1982). ©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 161 II. Preliminary Tests In order to test for the effects of inflationary expectations on the demand for money, one needs a measure of those expectations. One such measure is provided by the Livingston series as re- worked by Carlson.12 This series of "observed" inflationary ex- pectations is used in this paper. It provides a direct measure over six-month periods. However, an observed price expectations vari- able may contain various types of errors that could make it differ from the true, unobservable price expectations variable. There- fore, several alternative price expectations variables have been derived by the combined use of observed data and actual (known) price changes. These derived series—which incorporate expecta- tions hypotheses suggested by Turnovsky and Frenkel—will also be used and will be referred to as extrapolative, adaptive, Frenkel, and distributed.13 The period covered in the tests will be June 1964-December 1978. 1964 was taken as the initial year, as there was little inflation before then. December 1978 is the latest period for which the needed data were available when this paper was written. All the data are measured semiannually. Preliminary tests involved the estimation of the following equa- tions: where m and y denote, respectively, money (A/i) and income in 1972 prices; R denotes the interest rate on six-month Treasury bills, and TT is the measure of inflationary expectations. The esti- mations are made in logarithmic form for m and y. Table 2 shows the results. The first column identifies the series used for the inflationary expectation. "Observed" refers to the direct use of the Livingston-Carlson series, while the other four entries in the first column refer to the series derived by the com- bination of the Livingston-Carlson series with actual data on price level changes specified by various expectation hypotheses. The results for the short-run demand for money can be sum- marized briefly as follows: (1) The comparison of equation (6) with equations (7a) 12See Carlson (1977). 13For details, see Tanzi (1980) and Lahiri (1976). ©International Monetary Fund. Not for Redistribution TABLE 2. DEMAND-FOR-MONEY EQUATIONS, 1964-781 Inflationary Expectation 2 Used Constant R TT In y In m_i R H (6) Observed -0.4002 -0.5417 +0.0284 +0.8960 0.844 0.860 (0.47) (1.95) (0.73) (6.08)** (7a) Observed -0.2549 -1.250 +0.1412 +0.8740 0.901 0.144 (0.69) (5.44)** (4.37)** (14.37)** (7b) Distributed -0.1205 -1.1791 +0.1273 +0.8668 0.904 0.533 (0.35) (5.62)** (4.36)** (14.52)** (7c) Adaptive -0.0029 -1.0406 +0.1130 +0.8627 0.902 0.479 (0.008) (5.49)** (4.09)** (14.27)** (7d) Extrapolative -0.0752 -1,1838 +0.1313 +0.8258 0.890 0.758 (0.21) (4.95)** (3.93)** (12.89)** (7e) Frenkel -0.3205 -1.2951 +0.1508 +0.8742 0.900 -0.132 (0.85) (5.43)** (4.44)** (14.35)** (8a) Observed -0.4571 -0.2392 -1.1331 +0.1369 +0.9184 0.902 0.026 (1.14) (1.21) (4.58)** (4.25)** (13.03)** (8b) Distributed -0.4206 -0.3055 -1.0681 +0.1271 +0.9245 0.911 0.567 (1.10) (1.67) (5.01)** (4.50)** (13.75)** (8c) Adaptive -0.3570 -0.3387 -0.9425 +0.1155 +0.9273 0.911 0.475 (0.94) (1.87) (5.01)** (4.38)** (13.81)** (8d) Extrapolative -0.3577 -0.3940 -1.0718 +0.1344 +0.9045 0.904 0.554 (0.91) (2.13)* (4.66)** (4.29)** (12.85)** (8e) Frenkel -0.4866 -0.2117 -1.1798 +0.1451 +0.9133 0.901 -0.179 (1.19) (1.05) (4.50)** (4.23)** (12.82)** *One asterisk indicates significance at 5 per cent level; two asterisks indicate significance at 1 per cent level. Numbers in parentheses are f-values. A first-order Cochrane-Orcutt correction is employed in equation (6). The values of the //-statistic are within the acceptable range. ©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 163 through (7e) indicates that equations with inflationary ex- pectations in_place of the interest rate have greater explanatory power. The R is raised substantially when the rate of interest (R) is replaced by the variable measuring inflationary expectations (IT); furthermore, the f-values for TT are sharply higher than those for/?. (2) There is little difference among the five series of infla- tionary expectations. The directly observed series performs about as well as the other derived series. (3) Little is gained in terms of explanatory power when, as is done in equations (8a) through (8e), the rate of interest and inflationary expectations are jointly used in the same equation. However, in these equations, the £-values for the inflationary expectations variables remain highly significant while those for the interest rate are, for the most part, not significant. Further- more, the coefficient of R falls sharply when TT is added. (4) The coefficients for the lagged dependent variable are somewhat higher when the equations contain the interest rate than when they do not. This implies a long adjustment lag. III. Alternative Model In Section I, a theoretical argument was made for the inclusion of inflationary expectations among the arguments of the demand for money. Therefore, as equation (5) indicated, it was concluded that the demand for money should be written as The results in Table 2 indicated, however, that, empirically, not much_was gained by putting both TT and R in the same equation. The R2s were hardly affected. Furthermore, the use of both R and TT in the equation raises the problem of multicollinearity, since Rt =/(ir/). Elsewhere (see Tanzi (1980)) it has been shown that where r denotes the real interest rate; TT and R have the same meanings they had previously; and yt and yt denote, respectively, real actual and potential incomes. This equation indicates that in the absence of changes in economic activity (y, = yt) and expected inflation (TT = 0), the nominal rate of interest will equal the real rate and will be constant. If irt > 0 and yt = yt, then the nominal rate of interest will increase paripassu with the rate of inflation. ©International Monetary Fund. Not for Redistribution 164 VITO TANZI If yt £ yt, then the real rate will be affected, since, empirically, it appears that the coefficient of IT, is close to 1 (see Tanzi (1980)). The empirical relationship between the rate of interest and its determinants is shown in Table 3.14 Let us call the difference between yt and yt the gap and denote it by G,. Then Combining equations (5), (9), and (10), the demand-for-money equation can be restated as Equation (11) states that the demand for money is a function of (1) potential income, (2) the difference between actual and poten- tial income, and (3) inflationary expectations. The replacement of actual income with potential income is particularly significant, as it introduces a true scale variable not distorted by cyclical fluctu- ations.15 Therefore, the elasticity of the demand for money with respect to income can be estimated in a more meaningful way. Obviously, in the absence of cyclical fluctuations, the gap would disappear, so that the elasticity with respect to actual income would be identical to the elasticity with respect to potential in- come. Also, should inflationary expectations be reduced to zero when the gap is also zero, the relevant opportunity cost of holding money would be the real interest rate. In this case, the real inter- est rate would be constant; therefore, it would no longer play a role in the determination of changes in the demand for money. These would then depend exclusively on changes in a scale variable — namely, income. Let us restate the model to be tested. From equation (5), let In w, where mt* = long-run demand for real money balances yt = real (actual) income Rt = nominal interest rate IT, = expected inflation rate 14Note that in order to avoid difficulties with the logarithm of a negative number, a ratio specification of the gap is employed in the empirical analysis. 15This approach is consistent with that of studies using permanent income as an explanatory variable. See Laidler (1977). ©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 165 TABLE 3. INTEREST RATE EQUATIONS, 1964-781 (Equation (9)) Inflationary Expectation Used Constant TTr In G Observed +0.0275 +0.8480 +0.3280 R2 = 0.714 (3.77)** (5.12)** (3.01)** D-W = 1.640 Distributed +0.0286 +0.8265 +0.3609 R2 = 0.653 (3.91)** (4.64)** (3.01)** D-W = 1.717 Adaptive +0.0323 +0.7252 +0.3256 R2 = 0.603 (4.91)** (4.63)** (2.76)* D-W = 1.786 Extrapolative +0.0278 +0.8540 +0.3873 R2 = 0.624 (3.26)** (4.10)** (2.89)** D-W = 1.725 Frenkel +0.0272 +0.8433 +0.3215 R2 = 0.718 (3.72)** (5.18)** (2.98)** D-W = 1.642 ^ne asterisk indicates significance at 5 per cent level; two asterisks indicate significance at 1 per cent level. Numbers in parentheses are lvalues. A first- order Cochrane-Orcutt correction is employed. e, = error term From equation (9), where fr > 0, (32 > 0, and ut = error term Substituting equations (13) and (14) into equation (12) yields where Let us assume that ©International Monetary Fund. Not for Redistribution 166 VITO TANZI where 6,0<6 Therefore, the short-run equation for the demand for money can be written as where Table 4 shows the regression equations corresponding to equa- tion (17). These new equations, which correspond to the short-run de- mand for money obtained using the alternative model suggested in this paper, are clearly superior to those obtained using the traditional model with actual income and interest rate variables (see equation (6) in Table 2). Furthermore, in terms of explanatory power, they are comparable to those equations in Table 2 that use the inflationary expectation variable instead of the interest rate variable (see equa- tions (7a)-(7e) in Table 2). Table 4 has been estimated from a model that is conceptually different from the traditional one. In this model, (1) the interest rate has been replaced by its determinants, (2) inflationary expectation has been en- tered as a separate variable, and (3) a form of permanent income (poten- tial income) has replaced actual income. This model allows a separation of the effects associated with a true scale variable (potential income) from those associated with cyclical fluctuations. The explanatory power of the model is quite substantial. Of particular relevance is its clear indication that the variable measuring inflationary expectations plays a dominant role in the determination of the demand for money. IV. Concluding Remarks After experiencing several years of inflation, we should all by now be aware that relationships that hold under stable conditions may not hold in an inflationary environment. However, in spite of this awareness, the pervasive influence of taxes on the selection of ©International Monetary Fund. Not for Redistribution TABLE 4. NEW DEMAND-FOR-MONEY EQUATIONS, 1964-781 (Equation 17) Inflationary Expectation 2 Used Constant In mt-i In G In y 7T R H Observed -0.0743 +0.8572 +0.2390 +0.1275 -1.0284 (0.18) (12.74)** (2.30)* (4.22)** (3.84)** 0.905 0.196 Distributed -0.0589 +0.8610 +0.1944 +0.1225 -1.0598 (0.15) (13.10)** (1.84) (4.40)** (4.08)** 0.909 0.437 Adaptive +0.0180 +0.8588 +0.1719 +0.1128 -0.9694 (0.05) (12.97)** (1.57) (4.26)** (3.99)** 0.907 0.492 Extrapolative +0.0502 +0.8316 +0.1693 +0.1301 -1.1272 (0.12) (12.17)** (1.41) (3.84)** (3.40)** 0.896 0.647 Frenkel -0.1004 +0.8549 +0.2562 +0.1331 -1.0382 (0.23) (12.74)** (2.50)* (4.23)** (3.84)** 0.905 -0.057 JOne asterisk indicates significance at 5 per cent level; two asterisks indicate significance at 1 per cent level. Numbers in parentheses are /-values. The values of the //-statistic are within the acceptable range. ©International Monetary Fund. Not for Redistribution 168 VITO TANZI assets and the interaction of taxes with inflationary expectations in bringing about a fragmentation of the financial market is not yet fully understood. This paper has attempted to show how the de- sired asset compositions of economic agents and, consequently, the demand for money have been affected by taxes and by in- flation. It has been shown that in this environment, given the nature of the tax system, inflationary expectations have come to play a far more powerful role than interest rates in determining the demand for money. The former's inclusion among the deter- minants of demand for money should no longer be considered controversial. In this sense, it can be said that the influences on the demand for money in the United States have not been very different from those in other countries, including the developing countries. This conclusion vitiates the rule of thumb, attributed to Modigliani and supported by Dornbusch and Fischer in their mac- roeconomic textbook, on how "to decide whether the nominal interest rate or the expected rate of inflation should be included as determining the demand for money." The rule of thumb states that "if the nominal interest rate exceeds the expected rate of inflation, the nominal interest rate should be thought of as the cost of holding money. If the expected inflation rate exceeds the nom- inal interest rate, think of the expected inflation rate as the cost of holding money."16 When income taxes exist, even if the nomi- nal interest rate exceeds inflationary expectations, the oppor- tunity cost of holding money may often be better reflected by inflationary expectations than by the nominal return. This paper has emphasized that in the United States in recent years, the net-of-tax rate of return on financial assets was often lower than the rate of expected inflation. It therefore became convenient for many people to get out of both money and fi- nancial assets and into real goods (gold, houses, etc.). More re- cently, the inflation rate has been falling, while market rates of interest, for a variety of reasons, have remained high. Given these circumstances, one would expect that individuals would switch out of real goods and into financial assets and, perhaps, money. These switches would help to bring down high interest rates. The paper has concentrated on the demand for money. How- ever, the analysis developed in Section I can also be applied to the choice between interest-bearing financial assets and real assets when inflationary expectations are changing. When inflation ac- 16Dornbusch and Fischer (1978), p. 235. ©International Monetary Fund. Not for Redistribution INFLATION, TAXES, AND DEMAND FOR MONEY 169 celerates and the tax system is not changed, there will be a tenden- cy to move out of (fully taxed) financial assets and into relatively untaxed real assets. This shift will contribute to a lowering of bond prices and to a raising of real asset prices. When inflation de- celerates, the reverse will occur. These shifts have implications for the determination of the interest rate. They strengthen John Rutledge's argument17 that the interest rate at any one time is not only determined by flow variables but also by switches in the public's demand for existing assets. These switches do not change the volume of these assets but, by changing their values, affect their rates of return and, in the short run, the interest rate. These switches are often brought about by changes in inflationary ex- pectations, but they may also be brought about by significant tax changes of the types that the United States has enacted recently. REFERENCES Carlson, John A., "A Study of Price Forecasts," Annals of Economic and Social Measurement, Vol. 6 (Winter 1977), pp. 27-56. Darby, Michael R., "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Vol. 13 (June 1975), pp. 226-76. Dornbusch, Rudiger, and Stanley Fischer, Macroeconomics (New York, 1978). Feldstein, Martin, "Inflation, Income Taxes, and the Rate of Interest: A The- oretical Analysis," American Economic Review, Vol. 66 (December 1976), pp. 809-20. Friedman, Benjamin M., "Price Inflation, Portfolio Choice, and Nominal Inter- est Rates," American Economic Review, Vol. 70 (March 1980), pp. 32-48. Goldfeld, Stephen M., "The Demand for Money Revisited," Brookings Papers on Economic Activity: 3 (1973), pp. 577-638. Lahiri, Kajal, "Inflationary Expectations: Their Formation and Interest Rate Effects," American Economic Review, Vol. 66 (March 1976), pp. 124-31. Laidler, David E.W., The Demand for Money: Theories and Evidence (New York, 2nd ed., 1977). , "The Demand for Money in the United States—Yet Again," in On the State of Macro-economics, ed. by Karl Brunner and Allan H. Meltzer, Carnegie-Rochester Conference Series on Public Policy, Vol. 12 (Am- sterdam, 1980), pp. 219-71. Mundell, Robert A., "Inflation and Real Interest," Journal of Political Economy, Vol. 71 (June 1963), pp. 280-83. Rutledge, John, "What Lower Yield on Tangibles Means" (letter to the editor), Wall Street Journal, Vol. 199 (January 20, 1982), p. 23. 17Rutledge (1982). ©International Monetary Fund. Not for Redistribution 170 VITO TANZI Tanzi, Vito, "Inflation, Indexation and Interest Income Taxation," Banca Nazipnale del Lavoro, Quarterly Review, Vol. 29 (March 1976), pp. 64-76. , "Income Taxes and the Demand for Money: A Quantitative Analysis," Banca Nazionale del Lavoro, Quarterly Review, Vol. 32 (March 1979), pp. 55-72. , "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, Vol. 70 (March 1980), pp. 12-21. _, "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates: Reply," American Economic Review, Vol. 72 (forthcoming in Sep- tember 1982). Tobin, James, "Money and Economic Growth," Econometrica, Vol. 33 (Octo- ber 1965), pp. 671-84. ©International Monetary Fund. Not for Redistribution Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experience of the Seventies DONAL J. DONOVAN* N RECENT YEARS, the conditionality associated with upper I credit tranche adjustment programs for developing countries supported by the use of Fund resources has been a source of considerable discussion and debate. While the broad aim of Fund- supported programs—namely, "the restoration and maintenance of viability to the balance of payments in an environment of price stability and sustainable rates of economic growth" (Guitian (1982), p. 93)—is widely accepted, there is less agreement as regards the appropriateness of policies embodied in Fund condi- tionality as a means of achieving those objectives. It has been argued, for example, that even though what is thought of as a "typical Fund program" may achieve some improvement in the balance of payments—a conclusion that is by no means always accepted—such an outcome can often involve an excessive cost in terms of other objectives of particular importance to developing countries. This line of reasoning is frequently based on the belief that policies aimed at curbing demand pressures retard economic growth and also place a severe burden on the already low con- sumption and living standards of the population.1 *Mr. Donovan, economist in the Stand-By Policies Division of the Exchange and Trade Relations Department, is a graduate of Trinity College, Dublin. He received his doctorate from the University of British Columbia. *For a survey of many of the issues involved, see, for example, Bird (1981), pp. 23-33) and the references cited therein: see also Independent Commis- sion on International Development Issues ("Brandt Commission") (1980), pp. 215-16), Dell (1981), Nowzad (1981), and UNCTAD (1979). A comprehen- sive analysis of the evolution of Fund conditionality is contained in Guitian (1982). 171 ©International Monetary Fund. Not for Redistribution 172 DONAL J. DONOVAN In order to shed further light on the debate about the appropri- ateness of conditionality practices, an empirical examination of certain of the main issues would seem desirable. There is at present available, on a systematic and uniform basis and for long time periods, a wealth of published data on the major macro- economic variables for most developing countries. Even if it is unlikely to settle the issues conclusively, careful analysis of these data can provide some objective information regarding different aspects of the economic performance of countries undertaking adjustment programs supported by the Fund.2 The purpose of the present paper is to determine, on the basis of published data, what broad conclusions can be drawn from the experience of those developing countries that from 1971 to 1980 undertook adjustment programs supported by an upper credit tranche stand-by arrangement. Two sets of questions of direct relevance to macroeconomic performance are addressed explicit- ly. First, what changes did program countries experience in their balance of payments positions (as measured by movements in both their current account balances and overall balances), in- flation, and economic growth—all of which play central roles in the adjustment effort? Second, what was the outcome for other key macroeconomic variables—namely, savings, investment, and real consumption? These variables are of major concern to policymakers, since they indicate how changes in the external current account balance (defined as the difference between do- mestic savings and investment) reflect changes in the choice be- tween present and future consumption priorities. For the cases considered, the change in these variables is analyzed by factually comparing both the year before adoption of the program and the program period3 itself, and (as a means of evaluating longer-term trends) the three-year periods before and after the adoption of the program. In addition, to take into account exogenous events, such as movements in the terms of trade or world recessionary trends, that affected all developing countries during the decade, informa- tion on aggregate changes in the macroeconomic variables in question for all non-oil developing countries during corresponding periods is also presented. 2Published analyses of programs on a global basis have been made by Fund staff members (see Reichmann (1978) and Reichmann and Stillson (1978)). The recent programs of Jamaica and Portugal have also been studied (see Kincaid (1981) and Schmitt (1981), respectively). 3See Section I for a discussion of the concept of the program period. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 173 While the analysis described in this paper can provide useful evidence concerning the actual economic performance of the countries under review, several caveats seem in order. First, any general inferences drawn from the study cannot be interpreted as necessarily applying to a particular country or group of countries because of the highly aggregative nature of the analysis and the diversity of the countries considered. Second, no attempt has been made to distinguish between countries that implemented the policy actions envisaged in the Fund-supported programs and those that did not; any such distinction would of necessity entail elements of judgment and would reduce the factual and objective nature of the inquiry. Third, the analysis deals with the outcome in terms of overall macroeconomic performance and thus does not address the particular workings of specific policy instruments.4 More generally, caution should be exercised in interpreting the paper's results as representing the average degree of "effective- ness" of Fund-supported programs. In the first place, the review includes programs that may have been only partially imple- mented. Also, as both Guitian (1982) and Williamson (1981) have observed, a rigorous examination of this issue would involve a comparison of the actual outcome with the hypothetical outcome associated with the alternative policy actions (or lack of action) that might have been pursued by the authorities in the absence of Fund assistance. Such an approach, though appealing theoreti- cally, would involve considerable difficulties in practice, if only because it would require major elements of judgment, something this paper seeks to avoid. The plan of the paper is as follows. Section I describes the methodology used in the statistical analysis. Section II presents empirical evidence regarding the behavior of the balance of pay- ments, inflation, and growth, both for the countries under review and for all non-oil developing countries. Section III undertakes a similar analysis for savings, investment, and real consumption. Finally, Section IV summarizes and evaluates the main empirical findings of the paper and also discusses some issues deserving of further empirical investigation. The Appendix describes the coun- tries and program periods that provided the basis for the analysis. 4For an empirical examination of the fiscal content of upper credit tranche stabilization programs supported by the Fund, see Beveridge and Kelly (1980) and Beveridge (1981). The responses of selected macroeconomic variables to exchange rate actions undertaken as part of Fund-supported stabilization pro- grams during 1970-76 are analyzed in Donovan (1981). ©International Monetary Fund. Not for Redistribution 174 DONAL J. DONOVAN I. Methodology The basic aim of the analysis is to assess the extent to which the performance of each of the macroeconomic variables considered varied systematically before, during, and after each program period.5 For this purpose, performance was measured by calcu- lating the change in the variable in question during periods of comparison extending over "one year" and "three (or two) years." The shorter period reflects the change in the variable between the period immediately before the program began and the program period itself. The longer period involves a com- parison between the annual average level (or rate of change, where relevant) of the variable during the three-year period be- fore the program period began and the three-year or two-year period beginning with the adoption of the program. Two-year comparisons were used for all 1979 programs and some 1978 programs. The longer-run, three-year or two-year comparison, it was felt, would take into account the possible lagged effects of policies undertaken during the program period itself as well as the effects of policies pursued after the program ended. In viewing the evolution of macroeconomic performance in adjustment programs, it is important to try to take into account those exogenous factors that may have played a key role through- out the period. While this is difficult to do directly, a useful approach is to compare the economic performance of countries that undertook adjustment programs with the performance of all non-oil developing countries (NODCs). Accordingly, data on the change in each variable under analysis are presented for all NODCs together with the change in the program country vari- able.6 Joint examination of these two series provides some evi- dence on whether program countries' performance differed sys- tematically from that of developing countries in the aggregate.7 5The concept of the program period used for this analysis is explained in the Appendix. The data for all NODCs includes data for the program countries themselves, and thus the results tend to underestimate the actual differences between pro- gram and nonprogram countries. However, the underestimation involved is quite small, as for each period considered, program countries generally repre- sented less than 10 per cent of the countries included in the aggregate NODC series. 7However, care needs to be taken in interpreting the results of a relative comparison of this kind, since it is quite likely that by definition, program countries were, on average, faced with a greater need to adjust than non-oil developing countries in general. In particular, the external position of many ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 175 The disaggregated information for each variable and program period calculated in the manner described previously both for program countries and for all NODCs is then presented in aggre- gative form for each year during the decade and for the entire 1971-80 period. As a first standard of comparison, all programs are divided into those in which, for example, there was an increase in the variable in question and those in which there was a de- crease; this distinction is applied to both absolute and relative changes (i.e., the change in the program countries' variable mea- sured in relation to the change for all NODCs). As a second standard of comparison, simple unweighted averages of changes in program country variables are presented together with similar averages for the corresponding time periods for all NODCs.8 While in principle these two standards of comparison might not be expected to point necessarily in the same direction, it is interesting to note that for the results reported in this paper, they provide a basis for generally similar qualitative conclusions.9 In evaluating the reported results, it is useful to consider the implications of this paper's comparison of actual ex post economic performance as opposed to a comparison involving the hypothet- ical outcome in the absence of a program supported by the Fund; as was noted earlier, the latter comparison might be viewed as the theoretically ideal standard to apply in order to judge the effec- tiveness of programs supported by the Fund. Given the element of judgment that would be involved in the latter comparison, it is difficult to draw any general inferences. However, one possible nonprogram developing countries might not have required adjustment to restore a sustainable balance of payments position, while this was not generally the case in program countries. 8It should be noted that for individual countries within both the group of program countries and the group of all NODCs, the interpretation of a given change in a variable during any time period would depend upon the level of the variable at the beginning of the period. 9In a recent work by Connors (1979), a nonparametric rank test was used to assess whether during the period 1973-77, the behavior of certain macrovariables measured in absolute terms (viz., economic growth, inflation, the current ac- count balance, and the fiscal deficit/gross domestic product (GDP) ratio) ex- hibited a statistically significant difference in the one-year periods before and after initiation of Fund-supported programs. The coverage of the present study differs from that of Connors, since programs during a longer time period (1970-80) are included and comparisons extending over a three-year time hori- zon and taking into account the comparative behavior of all NODCs are exam- ined. Although the paper by Connors does not present data indicating the actual average changes in the variables recorded by program countries or the propor- tion of program countries that experienced increases or decreases in the vari- ables in question, some of his qualitative conclusions are discussed in Section II. ©International Monetary Fund. Not for Redistribution 176 DONAL J. DONOVAN quantitatively important aspect may be noted. If only the balance of payments indicators for a program country were considered, it might be concluded that the lack of financial assistance from the Fund (and other external assistance linked to the adoption of a program) might, in some circumstances, have led to an even smaller deficit in the current account and the overall deficit owing to the lesser availability of foreign exchange. However, such an outcome would in many cases reflect a resort to trade or exchange restrictions; although an "improvement" in the balance of pay- ments might occur, the use of controls to limit external imbalances would in all likelihood involve some cost in terms of growth and inflation objectives. In considering, therefore, the difference between a comparison based upon the actual change in perfor- mance and a comparison based upon the hypothetical outcome without a program, it is important to take into account not only the balance of payments outcome (which by itself could, in some instances, be misleading) but also the outcomes for economic growth and the domestic inflation rate. II. Performance in Terms of Main Objectives This section presents quantitative evidence regarding three as- pects of macroeconomic performance that are of major concern in programs supported by the Fund—namely, the balance of pay- ments, inflation, and economic growth. BALANCE OF PAYMENTS As described in this paper's opening paragraphs, the major external objective of adjustment programs is to achieve a sustain- able balance of payments position. In many cases, this may in- volve seeking a reduction in the current account deficit by adjust- ing domestic demand relative to the available supply of resources. However, depending on the circumstances of the economy (and, in particular, the extent to which increased foreign savings are attracted as a result of the stabilization effort undertaken by the authorities), a widening of the current account deficit may be quite consistent with an adjustment toward a position of external equilibrium. In these latter instances, programs would normally seek to achieve some improvement in the overall balance of pay- ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 177 ments. Thus, the analysis in this paper presents information on both the current account and the overall balance indicators.10 Table 1 contains data on the percentage point change in the current account/gross national product (GNP) ratio for program countries for each program year during the 1970s, as well as the average for the entire 1971-80 period; similar data for the corre- sponding periods are provided for all NODCs.11 In all years ex- cept 1974,1975, and 1980, the program countries experienced, on average, an absolute decline in the current account ratio com- paring the year before the program began with the program peri- od itself; using the three-year comparison period (thereby exclud- ing 1980), a reduction was recorded in all years except 1973,1974, and 1975. It is also apparent that program countries' deficits tended to change by considerably more than the average for all non-oil developing countries. Thus, in 15 of the 19 time periods of com- parison shown in Table 1 (10 1-year comparisons and 9 3-year comparisons), the decrease (increase) in program countries' defi- cit ratios was greater (lesser) than that of all NODCs. These results are mirrored by the calculation of the average change for the entire 1971-80 set of program periods. On average, program countries reduced their current account deficits by an amount equivalent to 1.5 percentage points of GNP during the program period itself and by 1.2 percentage points of GNP comparing the three-year annual average level in pre-program and post-program 10It may be noted that in the case of medium-term programs—for example, those supported by the extended fund facility (which are not included in the present analysis)—some widening of the overall deficit might be allowed for in the initial stage of the program, again depending on the country's particular circumstances. nThe current account ratio of the balance of payments is defined as the difference between gross domestic investment and gross national savings, ex- pressed as a ratio to GNP; all series were taken from the Fund's International Financial Statistics (IPS) national accounts series. In a small number of cases where GNP series were not available, a series based on gross domestic product (GDP) was used instead. The current account defined thus is equivalent to net exports of goods and services plus net factor income from abroad. National accounts data sources (rather than balance of payments data in foreign cur- rencies) were used to avoid complications involved in converting to local cur- rency and to provide consistency between movements in the current account balance and changes in the difference between savings and investment (see Section III). The corresponding aggregate NODC series was calculated as the unweighted average of all individual NODC data derived in the same manner as data for program countries (see Appendix). ©International Monetary Fund. Not for Redistribution TABLE 1. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN CURRENT ACCOUNT PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Changes in current account deficit as percentage of GNP)1 Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 One-year comparison3 Program countries 0.3 3.8 2.0 -2.6 -4.1 8.9 1.4 2.6 2.6 -0.4 1.5 AllNODCs -1.5 1.8 0.2 -2.0 -2.5 3.0 -0.2 -0.2 -1.0 -1.3 -0.4 Three-year comparison4 Program countries 0.4 0.7 -0.7 -2.5 -1.9 2.8 4.8 2.6 3.1 1.2 All NODCs 125 -0.2 -1.3 -2.0 -1.9 0.5 0.5 -0.4 -1.9 -0.8 Source: International Monetary Fund, International Financial Statistics, various issues. 1A positive figure indicates a reduction in the deficit, a negative figure an increase in the deficit. In a very small number of cases, ratios to GDP are used. Numbers for each year are simple arithmetic averages of data for individual programs. 2Equals the unweighted arithmetic average of all individual program country data for 1971-80 and, therefore, does not equal simple average of yearly columns; for the three-year comparison, calculation is made based only on 1971-79 data. 3Change in deficit comparing the year before the program began and the program year. 4Change in average annual deficit comparing the three-year period before the program began and the three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program calculations are made on a two-year basis. Similarly, 1979 data for all NODCs are on a two-year basis. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 179 periods. During the same periods of comparison, the deficits of all NODCs increased by 0.4 and 0.8 percentage points of GNP, respectively. Trends in the overall balance of payments are shown in Table 2.12 Except for 1971 (one-year comparison only), 1973 (three-year comparison only), and 1974 (both one-year and three- year comparisons), the overall balance calculated as a percentage of exports improved13 in each of the 19 periods considered.14 Viewed in relation to the change in the overall balance experi- enced on average by all non-oil developing countries, it can be seen that, except in 1971, a "relative" improvement occurred in every program year (including 1974, when the rise in the deficit recorded by program countries was, on average, less than that experienced by all NODCs). When the entire period was re- viewed, the average improvement in the overall balances of pro- gram countries amounted to between 5 and 7 per cent of exports (depending on whether the one-year or three-year comparison period was considered); during the same comparison periods, the overall balance of all NODCs remained, on average, roughly unchanged. Finally, Table 3 contains information on the behavior of the current account and the overall balance considered together.15 12The overall balance of payments is defined as the total change in reserves (expressed in dollars) plus changes in payments arrears (where available), both of which were taken from the IPS balance of payments series. The series for the change in reserves equals the change in gross official reserves adjusted for changes in the use of Fund credit. It does not include changes in foreign assets and liabilities of commercial banks and, therefore, corresponds (except for changes in non-Fund official liabilities) to the change in net foreign assets of the monetary authorities adjusted for any accumulation/reduction in payments ar- rears. The adjustment for arrears was possible to undertake in most cases for those countries in the program set known to have arrears (i.e., the Congo, Ghana, Guyana, Jamaica, Zaire, and Zambia); however, arrears data were not available for Turkey and Sudan. For all non-oil developing countries, the overall balance series was derived as the aggregate change in gross official reserves adjusted for net use of Fund credit (both series taken from IPS). Improvement in this context refers to either a larger overall surplus or a smaller overall deficit. 14Exports, rather than GDP, was employed as the scaling factor to facilitate aggregate comparisons of trends in the overall deficit, as the use of GDP would involve complications in choosing the appropriate exchange rate to use for conversion purposes. 15Only program countries for which data are available for both indicators during the same time periods are included; thus, certain countries whose na- tional accounts data and balance of payments data refer to different time periods are excluded. As a result, the number of programs considered is less than in Tables 1 or 2. ©International Monetary Fund. Not for Redistribution TABLE 2. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN OVERALL BALANCE OF PAYMENTS PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Change in overall balance as percentage of exports)1 Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 Change in overall balance as per cent of exports One-year comparison3 Program countries -2.0 13.6 2.9 -9.9 3.2 23.1 5.4 5.2 8.6 2.7 5.6 All NODCs 0.7 9.0 -2.0 -12.4 -4.0 10.8 0.9 2.0 -5.3 -3.2 -0.3 Three-year comparison Program countries4 6.3 7.0 -1.6 -7.2 2.5 13.0 11.5 14.3 7.9 7.1 All NODCs 5.9 4.1 -5.4 -9.8 -5.5 5.1 6.1 1.5 -5.3 0.1 Source: International Monetary Fund, International Financial Statistics, various issues. !A positive figure indicates an improvement, which is defined as either a larger overall surplus or a smaller overall deficit. A negative figure indicates a deterioration, which is defined as either a smaller overall surplus or a larger overall deficit. Numbers for each year are simple arithmetic averages of data for individual programs. 2Equals unweighted arithmetic average of all individual program country data for 1971-80 and therefore does not equal simple average of yearly columns; for the three-year comparison, the calculation is made based only on 1971-79 data. 3Change in overall balance comparing the year before the program and the program year. 4Change in average annual overall balance comparing the three-year period before the program began and the three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program calculations are made on a two-year basis. Similarly, 1979 data for all NODCs are on a two-year basis. ©International Monetary Fund. Not for Redistribution TABLE 3. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: EXTERNAL SECTOR PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS 1971-80 Program Year Share 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total of total nUMBER OF COURSE Per cent One-year comparison Total 8 7 6 3 5 6 7 9 8 5 64 100 Absolute improvement in one or more external indicators 3 7 4 2 3 6 5 8 5 3 46 72 Current account ratio only1 1 0 2 1 0 0 0 2 1 0 7 11 Overall balance ratio only2 0 1 1 1 3 0 0 2 1 2 11 17 Current account and overall balance 2 6 1 0 0 6 5 4 3 1 28 44 Relative improvement in one or more external indicators:3 7 4 4 3 4 6 5 8 6 4 51 80 Current account ratio only1 5 1 2 0 0 2 0 2 2 1 15 23 Overall balance ratio only2 0 0 1 1 1 1 0 1 1 1 7 11 Current account and overall balance 2 3 1 2 3 3 5 5 3 2 29 45 Three-year comparison Total 8 7 6 3 5 6 7 8 4 54 100 Absolute improvement in one or more external indicators 8 7 4 2 4 5 7 7 3 47 87 Current account ratio only1 1 1 2 0 0 0 2 1 1 8 15 Overall balance ratio only2 3 2 1 0 1 1 2 3 2 15 28 Current account and overall balance 4 4 1 2 3 4 3 3 0 24 44 Relative improvement in one or more external indicators3 7 6 6 3 5 5 6 7 3 48 89 Current account ratio only1 4 2 1 0 1 0 3 1 0 12 22 Overall balance ratio only2 1 0 3 1 1 1 1 2 1 11 20 Current account and overall balance 2 4 2 2 3 4 2 4 2 25 46 Source: International Monetary Fund, International Financial Statistics, various issues. ]Change in ratio of current account balance to GNP (or, in a small number of cases, to GDP); improvement refers to a smaller deficit or a larger surplus. 2Change in overall balance as a percentage of exports; improvement refers to a smaller deficit or a larger surplus. 3Change in program country variable compared with change in corresponding variable for all non-oil developing countries during identical comparison periods— namely, the year before the program began and the program year, and the three-year period before the program and the three-year period beginning with the program year. ©International Monetary Fund. Not for Redistribution 182 DONAL J. DONOVAN Examining performance during the year of the program itself, 72 per cent of all program countries experienced either an abso- lute reduction in the current account ratio and/or an improvement in the overall balance ratio; measured relative to the average change for all NODCs, the proportion of such program countries was 80 per cent. On a three-year comparative basis, the number of countries registering either a reduction in the current deficit ratio and/or an improvement in the overall balance rose further, to 87 per cent or 89 per cent, depending on whether absolute or "relative" changes are analyzed. This evidence suggests that if changes in the current account and overall balance are taken as a standard of measurement, program countries tended, on average, to achieve some significant improvement in their balance of payments performance in both the short run and the long run. This improvement occurred both in an absolute sense and in relation to the average trends experi- enced by all NODCs. For the latter comparison, of course, the striking reductions recorded for program countries would be con- sistent with a relatively greater need on their part to undertake external adjustment.16 INFLATION The outcome for program countries' inflation performance is presented in Tables 4 and 5. In order to lessen statistical dis- tortions in the averaging procedure, a small number of program countries with exceptionally high rates of inflation (defined as those in which inflation rates in excess of 35 per cent per year were recorded) were removed from the program set.17 The data indi- 16The results described (for the one-year absolute comparison of the current account balance) may be compared with those reported by Connors (1979). Although Connors used the absolute level of the current account deficit (rather than the deficit/GNP ratio)—which would tend to understate the possible im- provement in an inflationary period—he found that, on average (and consistent with this paper's results), an improvement took place. Connors also reported that the difference was statistically insignificant at the 95 per cent confidence level; in other words, there existed at least a 5 per cent chance that the "after" and "before" series were from the same "population." However, in order prop- erly to evaluate the importance of the latter result, it would be helpful to know how close the test statistics were to the 95 per cent level—that is, how much greater than 5 per cent the probability was that there was no difference in the pre-program and post-program behavior of the series. 17See the Appendix for details. The inflation variable was taken to be the average change in consumer prices (from IPS). While the GDP deflator might for some purposes be a better indication of the underlying inflation rate, data for this variable were not as readily available for many program countries. The NODC series was taken from International Monetary Fund (1981). ©International Monetary Fund. Not for Redistribution TABLE 4. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: INFLATION PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS 1971-80 Program Year Share 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Tota of total Number of countries Per cent One-year comparison Total 8 7 6 4 5 6 7 8 10 12 73 100 Absolute improvement 4 3 0 0 2 5 2 5 3 2 26 36 Relative improvement1 6 4 4 3 2 5 1 2 7 8 42 58 Three-year comparison Total 8 7 6 4 5 5 6 8 10 59 100 Absolute improvement 2 0 0 1 3 4 4 5 6 25 42 Relative improvement1 7 6 3 4 5 4 3 5 7 44 75 Sources: International Monetary Fund, International Financial Statistics, various issues; International Monetary Fund (1981). Change in program country's rate of consumer price inflation compared with change in rate of consumer price inflation for all non-oil developing countries during identical comparison periods—namely, the year before the program began and the program year, and the three-year period before the program began and the three-year period beginning with the program year. ©International Monetary Fund. Not for Redistribution 00 TABLE 5. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN INFLATION PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Change in the rate of increase in consumer prices)1 Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 One-year comparison3 Program countries4 0.5 1.4 7.3 5.9 0.3 -11.1 0.4 1.8 2.2 6.2 1.8 All NODCs 1.7 2.9 8.9 6.6 -1.7 0.6 -0.5 -3.4 5.2 8.8 3.2 Three-year comparison5 Program countries4 3.1 9.4 11.0 2.5 -1.4 -3.5 -5.0 0.7 2.0 2.3 All NODCs 7.2 12.5 15.2 12.7 6.0 0.2 -1.2 2.8 5.3 6.9 Sources: International Monetary Fund, International Financial Statistics, various issues; International Monetary Fund (1981). 1A positive figure indicates an increase in the inflation rate, a negative figure a decrease in the inflation rate. Numbers for each year are simple arithmetic averages of data for individual programs. 2Equals unweighted arithmetic average of all individual program country data for 1971-80 period and therefore does not equal simple average of yearly columns; for the three-year comparison, calculation is made based only on 1971-79 data. 3Change in the rate of consumer price inflation comparing year before program began and program year. 4Excludes certain high-inflation program countries (i.e., those with recorded inflation rates in any one year greater than 35 per cent). 5Change in the annual average rate of consumer price inflation comparing the three-year period before the program began and the three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program calculation is on a two-year basis. Similarly, 1979 data for all NODCs are on a two-year basis. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 185 cate that in only slightly more than one third of this adjusted set of program countries were inflation rates reduced; on average, the annual rate of consumer inflation rose by about 2 percentage points following the adoption of the program, for both one-year or three-year comparison periods. It may be noted that one factor contributing to this outcome could be the effect of relative price adjustments sometimes undertaken as part of stabilization pro- grams, such as increases in administered prices and depreciation of the exchange rate. However, a somewhat different picture emerges when one con- siders the behavior of the average inflation rate in all non-oil developing countries during the same periods. Such an assess- ment is of particular relevance, since theoretical considerations would suggest that for those small, open economies with a fixed exchange rate, the prevailing level of world inflation exerts an important influence on the domestic inflation rate, at least over the longer run. Viewed in relation to inflation trends in all NODCs, 58 per cent of program countries attained some relative reduction in inflation rates during the program period, while 42 per cent did not; the average program country inflation rate rose by 1.8 percentage points, compared with an average increase of 3.2 percentage points in NODC inflation. Over a three-year period, a relative improvement occurred in a higher proportion (75 per cent) of programs; the increase recorded for program countries averaged 2.3 percentage points, while all NODCs' in- flation rates increased by an average of 6.9 percentage points. This relatively better inflation performance registered by program countries over a longer time period is a not unexpected outcome, as the price adjustment measures referred to earlier would tend to have a once-and-for-all impact on recorded inflation rates in program countries over the short run (i.e., during the program period). ECONOMIC GROWTH The data on economic growth performance contained in Ta- ble 6 do not suggest a clear-cut pattern.18 About half (between 48 and 57 per cent) of the program countries experienced an increase 18Economic growth was calculated as the change in GDP at constant prices (taken from International Monetary Fund, International Financial Statistics, var- ious issues). The non-oil developing countries series was taken from Interna- tional Monetary Fund (1981). ©International Monetary Fund. Not for Redistribution TABLE 6. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: ECONOMIC GROWTH PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS 1971-80 program Year Share 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total of total nUMBER OF COUNTRIES PERCENT One-year comparison Total 8 7 7 4 6 6 9 9 8 11 75 100 Absolute improvement 5 2 6 3 1 4 5 4 3 3 36 48 Relative improvement1 5 3 4 3 3 3 5 4 4 4 38 51 Three-year comparison Total 8 7 7 4 6 6 9 9 7 63 100 Absolute improvement 2 4 4 3 3 3 5 7 2 33 52 Relative improvement1 3 4 5 3 5 3 4 6 3 36 57 Sources: International Monetary Fund, International Financial Statistics, various issues; International Monetary Fund (1981). Change in program country's real growth rate compared with change in real growth rate of all non-oil developing countries during identical comparison periods—namely, the year before the program began and the program year, and the three-year period before the program began and the three-year period beginning with the program year. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 187 in their real growth rates, and about half a decrease; this result holds irrespective of whether short-run or long-run periods are considered or whether the absolute change or the change relative to that of all NODCs is measured. A similar picture is presented in Table 7, which indicates that, on average, program countries' growth rates declined by 0.3 percentage points in the short run but were unchanged over a longer-term comparison period. The real growth rate experienced by all NODCs fell marginally during the corresponding periods by 0.2 per cent and 0.4 per cent, respec- tively. Thus, in the short run, the change in the growth rates achieved on average was little different from that of all non-oil developing countries, while program countries' growth perfor- mance improved slightly, in a relative sense, during a three-year comparison period. Overall, therefore, the aggregative evidence is consistent with the views that, in general, program countries' economic growth performance tended not to have changed greatly during the pro- gram periods and that this outcome was not significantly different from the NODC average; however, some modest relative in- creases in growth rates could be said to have taken place over a longer period. In any event, the evidence analyzed here would not support the hypothesis that program countries generally experi- enced either sharp slowdowns or sharp rises in their economic growth rates.19 III. Developments in Other Key Variables The preceding section sought to provide some systematic infor- mation regarding the outcome for the balance of payments, infla- tion, and growth—variables of major concern in Fund-supported adjustment programs. Also of considerable importance is the question of how other key macroeconomic variables might have been affected during the period of the adjustment effort. In an attempt to address some of the relevant issues, this section investi- gates the behavior of savings and investment separately in relation to GNP, so as to provide a basis for an interpretation of the observed change in the current account ratio. The savings ratio, in turn, together with the behavior of changes in real output, pro- vides information on trends in real consumption—a variable often 19This conclusion is consistent with the results reported by other authors. See Connors (1979), Donovan (1981), and Reichmann and Stillson (1978). ©International Monetary Fund. Not for Redistribution TABLE 7. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN ECONOMIC GROWTH PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Change in growth rate of real GDP)1 Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 One-year comparison3 Program countries -1.6 -0.2 2.4 4.5 -3.2 3.0 0.2 -0.2 -1.9 -2.3 -0.3 All NODCs — -1.1 1.3 -0.7 -1.6 1.4 -0.6 0.7 -0.6 -0.5 -0.2 Three-year comparison4 Program countries -0.9 -1.1 0.5 1.7 -0.6 -0.4 -0.5 0.6 -1.6 — All NODCs -0.4 -0.8 -0.4 -0.8 -0.9 -0.1 0.1 0.2 -0.5 -0.4 Sources: International Monetary Fund, International Financial Statistics, various issues; International Monetary Fund (1981). 1A positive figure indicates an increase in the growth rate of GDP, a negative figure a decrease in the growth rate of GDP. Numbers for each year are simple arithmetic averages of data for individual programs. 2Equals unweighted arithmetic average of all individual program country data for 1971-80 period and therefore does not equal simple average of yearly columns; for the three-year comparison, the calculation is made based only on 1971-79 data. 3Change in real GDP growth rate comparing the year before the program began and the program year. 4Change in annual average real GDP growth rate comparing the three-year period before the program began with the three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program calculations are made on a two-year basis. Similarly, 1979 data for all NODCs are on a two-year basis. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 189 of direct political and social relevance and one that tends to be affected by policies designed to adjust domestic demand. CHANGES IN SAVINGS AND INVESTMENT As indicated in the previous section, the current account deficit ratio tended, on average, to decrease for program countries. Since the current account balance is equal to the difference between domestic investment and national savings, it is of interest to exam- ine whether this outcome was the result of changes in the savings ratio, in the investment ratio, or in both ratios. According to the evidence summarized in Table 8, in about 60 per cent of program countries, the savings ratio rose; this proportion is identical for one-year and three-year comparisons.20 The average rise recorded (Table 9) was equivalent to about V2 of 1 percentage point of GNP (again, this calculation was invariant to whether behavior in the short run or long run was analyzed). At the same time, however, slightly less than two thirds of the pro- grams recorded decreases in the investment/GNP ratio during the program period: a decrease occurred in a slightly smaller per- centage of cases (55 per cent) over the three-year comparison period.21 The average decline in the investment ratio was equiv- alent to between 0.6 and 1.0 percentage points of GNP. Thus, while the results do not appear to exhibit a clear-cut pattern, it nevertheless seems that there was some tendency for the reduction experienced, on average, in the current account deficits of program countries to be reflected in a small increase in the savings ratio accompanied by a somewhat larger decline (in the longer run) in the investment ratio. As noted in the preceding section, since economic growth rates were, by and large, un- affected on average in program countries, this outcome would be consistent with some improvement in the productivity of in- vestment expenditures. For NODCs in general, the savings/ investment performance exhibited was different; since their aver- age investment ratio rose, while the national savings ratio either remained unchanged (in the short run) or rose by less than the 20The national savings ratio was calculated from the national account series as follows: GNP minus the sum of government consumption and private consump- tion, expressed as a fraction of GNP. As was done with the current account balance, the domestic savings ratio was employed in a few instances rather than the national savings ratio. 21The investment ratio equalled the sum of gross fixed capital formation plus the change in stocks, expressed as a fraction of GNP. ©International Monetary Fund. Not for Redistribution TABLE 8. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: SAVINGS AND INVESTMENT PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Savings and investment as a ratio to GNP)1 1971-80 Program Year Share 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total of total •< ' • Number of countries Per cent One-year comparison2 Total 8 7 8 5 7 6 9 10 10 8 78 100 Savings ratio Absolute increase 4 6 8 2 0 5 7 6 6 2 46 59 Relative increase3 4 3 8 2 4 3 7 6 6 5 48 62 Investment ratio Absolute increase 3 0 6 3 2 0 4 3 4 5 30 38 Relative increase3 2 2 6 1 2 0 4 3 2 5 27 35 Three-year comparison4 Total 8 7 8 5 7 6 9 9 6 65 100 Savings ratio Absolute increase 5 6 4 1 2 5 6 6 4 39 60 Relative increase3 4 2 4 1 2 2 4 5 4 28 43 Investment ratio Absolute increase 2 5 6 2 4 1 3 3 3 29 45 Relative increase3 2 3 5 1 3 0 2 3 2 21 32 Source: International Monetary Fund, International Financial Statistics, various issues. aln a very small number of cases, ratios to GDP are used. 2Change in ratio comparing year before program began and program year. 3Change in program country variable compared with change in corresponding variable for all non-oil developing countries during identical comparison periods. 4Change in ratio comparing the average levels during the three-year period before the program began and the three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program comparison is on a two-year basis. ©International Monetary Fund. Not for Redistribution TABLE 9. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN SAVINGS AND INVESTMENT PERFORMANCE COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS (Changes in savings and investment as percentages of GNP)1 Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 One-year comparison3 Change in: Savings ratio Program countries -0.3 0.9 3.3 -0.8 -5.0 5.0 1.9 0.1 1.1 -1.3 0.5 All NODCs -0.7 1.0 0.9 0.4 -2.1 2.4 0.3 -0.2 -0.1 -1.4 — Investment ratio Program countries -0.7 -2.9 1.4 1.7 -0.9 -3.8 0.4 -2.6 -1.5 -0.9 -1.0 All NODCs 0.9 -1.0 0.7 2.5 0.3 -0.5 0.4 — 0.8 — 0.4 Three-year comparison4 Change in: Savings ratio Program countries 0.2 1.6 1.2 -1.9 -1.9 0.6 2.5 0.3 2.5 0.6 All NODCs 0.8 1.3 0.8 0.6 0.1 1.2 1.0 0.3 -0.8 0.6 Investment ratio Program countries -0.3 1.0 2.0 0.6 — -2.1 -2.4 -2.3 -0.7 -0.6 All NODCs 1.8 1.5 2.1 2.6 2.0 0.8 0.5 0.6 0.9 1.4 Source: International Monetary Fund, International Financial Statistics, various issues. 1A positive figure indicates an increase in the savings ratio or the investment ratio, a negative figure a decrease in one of these ratios. Numbers for each year are simple arithmetic averages of data for individual programs. In a very small number of cases, ratios to GDP are used. The change in the (savings-investment) ratio shown in this table is identical to the change in the current account deficit ratio shown in Table 1, except for minor rounding errors present for some individual years. 2Equals the unweighted arithmetic average of all individual program country data for 1971-80 and, therefore, does not equal simple average of yearly columns; for the three-year comparison, calculations are made based only on 1971-79 data. 3Change in ratio comparing year before the program began and the program year. 4Change in ratio comparing three-year period before the program began and three-year period beginning with the program year. For some 1978 programs and all 1979 programs, post-program calculation is on a two-year basis. Similarly, 1979 data for all NODCs are on a two-year basis. ©International Monetary Fund. Not for Redistribution 192 DONAL J. DONOVAN increase in the investment ratio (in the longer run), their current account deficits tended to rise. This difference in behavior could reflect the fact that the external imbalances in many program countries may have required some adjustment in investment, after taking into account the potential for realizing increased domestic savings. For many developing countries not in the program set, however, a widening current account deficit (partly reflecting an increase in investment) may well have been consistent with the maintenance of a viable external position. CHANGES IN REAL CONSUMPTION In discussing the effectiveness of adjustment policies, it is gen- erally recognized that the ability of many governments to imple- ment a stabilization effort successfully and on a sustained basis will be heavily influenced by the effects of their policy measures on the living standards of the population and the length of time during which such effects may be present. Although the concept of living standards cannot be measured directly, some inferences can be drawn by examining trends in real consumption. As was noted previously, the savings/GNP ratio tended to rise on average for program countries, which implies that there was a corresponding decline in the consumption/GNP ratio. However, the real growth rates of program countries did not exhibit any marked tendency to fall. Thus, provided the real growth rate was positive and sufficiently large, an increase in the savings rate would be consistent with some rise in real consumption, as part of the increment to the supply of resources could be used to improve the external position while also permitting some increase in the volume of consumption expenditures.22 According to the evidence summarized in Table 10, 42 per cent of program countries experienced an increase in the rate of real consumption growth23 during the program period.24 This propor- 22 More precisely, (C/PC) = (C/Y) + y + Py - Pc where C and Y denote nominal consumption and income, y denotes real income, Pc and Py denote indexes of consumer prices and the GDP deflator, respectively, and an asterisk indicates a percentage rate of change. 23The change in real consumption was defined as the percentage change in total consumption, adjusted for the change in the consumer price index; total consumption equalled the sum of government consumption and private con- sumption, with both variables taken from the IPS national accounts series. The NODC series was derived as the simple average of series calculated in the same manner for all non-oil developing countries. 24This includes cases where a reduction in the rate of decline of real consump- tion took place. ©International Monetary Fund. Not for Redistribution TABLE 10. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: CHANGES IN REAL CONSUMPTION COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS1 1971-80 Program Year Share 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total of total - Number of countries - Per cent One-year post-program comparison Total 868576 9 9 9 6 73 100 Number experiencing: Positive rate of real consumption growth 856553 4 6 6 5 53 73 Increased rate of real 2 consumption growth 4 0 5 4 2 1 3 3 7 2 31 42 Three-year post-program comparison Total 8 6 8 5 6 6 9 8 5 ... 61 100 Number experiencing: Positive rate of real consumption growth 8 6 8 5 6 4 5 6 4 ... 52 85 Increased rate of real consumption growth2 4 2 4 3 1 3 2 6 4 ... 29 48 Source: International Monetary Fund, International Financial Statistics, various issues. Change in the sum of government and private consumption, deflated by the consumer price index. Includes programs in which a reduction in the rate of decline of real consumption occurred. ©International Monetary Fund. Not for Redistribution 194 DONAL J. DONOVAN tion rises slightly over a long-term period (to 48 per cent), an outcome consistent with the view that the adjustment measures might exercise a relatively larger expenditure-restraining effect at the outset of the adjustment effort than later on. At the same time, between 52 and 58 per cent of program countries experi- enced a reduction in the growth rate of real consumption. How- ever, Table 10 also indicates that a large majority (ranging from 73 to 85 per cent) of programs maintained positive growth rates during both one-year and three-year comparison periods. Thus, while there was some tendency for the rate of increase in real consumption to slow down, real consumption nonetheless gener- ally continued to increase. In terms of the actual changes recorded, Table 11 indicates that, on average, program countries experienced a fall of 0.2-0.3 per- centage points in their annual average growth rates of real con- sumption. However, the real consumption growth rate remained, on average, positive in the period following the adoption of the program (3.6 per cent or 4.3 per cent, depending on the time period examined). While no precise population data are available, these increases would in all likelihood be consistent with a modest rise in per capita real consumption. Finally, the growth rates experienced by program countries tended, on average, to be lower (by about one percentage point) than those of all NODCs in the periods following the adoption of the programs; at the same time, the reduction in the growth rate was generally less than that ex- perienced by all NODCs. IV. Summary and Conclusions The purpose of this paper has been to provide systematic quan- titative evidence regarding the macroeconomic performance of developing countries that in the 1970s undertook adjustment pro- grams supported by the use of Fund resources under stand-by arrangements in the upper credit tranches. Since the approach taken is a highly aggregative one, the overall findings conceal a wide diversity of outcomes and thus should not be taken as ap- plying to any particular country or group of countries. Also, the results should not be necessarily interpreted as a direct gauge of the "effectiveness" of Fund-supported programs, particularly since no attempt was made either to relate results to actual policy implementation or to assess what might have occurred in the ©International Monetary Fund. Not for Redistribution TABLE 11. UPPER CREDIT TRANCHE STAND-BY ARRANGEMENTS, 1971-80: AVERAGE CHANGE IN REAL CONSUMPTION COMPARING PRE-PROGRAM AND POST-PROGRAM PERIODS1 (In per cent) Program Year Average for 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1971-802 One-year comparison Program countries Before program 6.5 5.0 5.0 0.7 9.8 5.1 0.7 1.6 0.4 5.5 3.9 During program 6.5 2.9 3.0 20.5 2.5 3.7 -1.3 0.6 0.9 4.8 3.6 All NODCs Before program 6.4 5.1 5.2 5.3 5.3 4.1 5.6 5.3 4.9 3.2 5.1 During program 5.1 5.2 5.3 5.3 4.1 5.6 5.3 4.9 3.2 3.2 4.7 Three-year comparison Program countries Before program 7.2 5.7 5.0 1.8 9.0 6.4 3.0 0.9 1.0 4.5 During/after program 6.2 5.4 4.8 7.1 6.4 4.4 -0.6 3.3 3.6 4.3 All NODCs Before program 5.8 5.7 5.6 5.2 5.3 4.9 5.0 5.0 5.3 5.3 During/after program 5.2 5.3 4.9 5.0 5.0 5.3 4.5 3.8 3.2 4.7 Source: International Monetary Fund, International Financial Statistics, various issues. 1 Change in the sum of government and private consumption, deflated by the change in consumer prices. Numbers for each year are simple arithmetic averages of data for individual programs. 2Equals unweighted arithmetic average of all individual program country data for 1971-80 and therefore does not equal simple average of yearly columns. For the three-year comparison, calculations were made based only on 1971-79 data. ©International Monetary Fund. Not for Redistribution 196 DONAL J. DONOVAN absence of a Fund-supported program. Nevertheless, by investi- gating the experience with a large number of programs25 over both the short run and the long run, together with the per- formance of all non-oil developing countries, some objective evidence can be obtained as to the extent to which program coun- tries' average performance differed from that of non-oil devel- oping countries in general. Such an approach seems especially relevant to an examination of some of the important issues raised in the discussions of the Fund's conditionality practices. Specifi- cally, two sets of questions were addressed. First, to what extent did program countries experience, on average, improvements in their balance of payments, inflation, and growth performances (all of which are objectives of Fund-supported programs)? Sec- ond, what can be said about other key variables that may also be affected by adjustment efforts; in particular, how were changes in the current account decomposed into changes in savings and in- vestment, and what were the effects on real consumption? As regards the first set of questions, the statistical evidence presented strongly points to the conclusion that if changes in the current account and the overall balance of payments are viewed as indicators, the external sector generally exhibited a significant improvement in program countries. The changes that occurred in these indicators in program countries were generally larger than those recorded by all NODCs, an outcome consistent with the former group's greater need to undertake external adjustment. In the case of inflation, the evidence indicates that considerably less progress was achieved in terms of actually reducing rates of price increase. Nevertheless, program countries tended to experience a decrease in their average domestic inflation rates relative to the inflation rates in all NODCs, particularly over the longer-run period of comparison. As regards the rate of economic growth, the evidence does not support the hypothesis that there was any significant downward bias in the performance of program coun- tries. By and large, programs seemed overall to be associated with a broadly neutral outcome, insofar as the economic growth vari- able was concerned. Turning to the second set of questions raised, the absence of a downward bias in the growth rate is to be noted, since the im- provement in the current account deficit ratio was generally 25Between 54 and 78, depending upon the variables examined and the com- parison period. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 197 brought about partly by a decline in the average investment/GNP ratio; such an outcome would be consistent with some increase in the productivity of investment. The external improvement also resulted, on average, from a rise in the national savings ratio. However, largely because rates of economic growth tended to be maintained, this increased savings did not appear to result in a major compression of real consumption. Although for more than half of the program countries, annual real consumption growth rates declined slightly, in a large majority of cases, they remained positive at an average level of around 4 per cent, which, in all likelihood, would be consistent with a small increase in per capita real consumption levels. The central finding of the paper, therefore, is that in broad terms, program countries recorded significant reductions in their external deficits while they exhibited only marginal changes in their growth rates of real GDP and consumption—changes that were not significantly different from those experienced by non-oil developing countries in general. Thus, considering the group of program countries in the aggregate, the costs associated with the external adjustment effort appear to have been less severe than has sometimes been suggested by participants in the controversy on Fund conditionality. These results could be viewed as consis- tent with the purpose of Fund conditionality—namely, the pro- vision of external financial assistance conditional on the adoption of appropriate policy measures so as to promote balance of pay- ments adjustment while minimizing the disruptive effect on eco- nomic activity or economic welfare. The previously mentioned finding—namely, that for program countries balance of payments variables were the most affected, while inflation and (especially) economic growth were less affected—could be explained by a number of general considera- tions. One factor is that unlike inflation and growth, which are in principle unbounded in either direction, the balance of payments represents, in a sense, a budget constraint on the economy; even in the absence of appropriate measures, there is a limit on the size of the external deficit an economy can incur—a limit that gener- ally tends to narrow over time. Also, since the balance of pay- ments variables represent the difference between the demand for, and the supply of, resources, a combined use of demand manage- ment and supply policies may have a relatively powerful impact on the size of external deficits. By contrast, the rate of economic growth is less susceptible in the short run to policy action than ©International Monetary Fund. Not for Redistribution 198 DONAL J. DONOVAN other target variables, as it ultimately reflects supply conditions; this is particularly true for economies where the production of primary commodities determines, to a large extent, the growth rate. As regards the inflation objective, in many instances, adjust- ments in administered prices introduced as part of a stabilization effort aimed at improving the structure of relative prices will tend to impart an upward bias to recorded rates of inflation, especially if these adjustments are undertaken at relatively infrequent inter- vals; also, for those small, open economies with a fixed exchange rate, the imported inflation rate can be an important factor influ- encing the domestic inflation rate. Finally, the paper's conclusions reflect the results obtained from an aggregative analysis of certain indicators of the macro- economic performance of program countries on average. Several areas suggest themselves for further study. For example, there is scope for a more complex statistical investigation of the data involving, for instance, correlation and other statistical signifi- cance tests. In addition, in view of the wide diversity of individual experiences subsumed in the aggregative analysis, it would be useful to explore the extent to which the results vary between different subgroups of program countries—for example, by con- sidering those countries with real per capita incomes below a certain level. In the same vein, it could be useful to distinguish economies that exhibit a broadly similar degree of openness to foreign trade or that have a comparable export structure. APPENDIX Definitions and Coverage of Data This appendix describes the methodology underlying the choice of program countries and program periods and also lists the countries and periods used for each variable as well as the corresponding NODC series. CHOICE OF PROGRAM COUNTRIES AND PERIODS The analysis includes only upper credit tranche stand-by arrangements con- cluded during the period 1971-80.26 Extended arrangements were excluded from 26The study includes two-year stand-by arrangements, which were treated as equivalent to two distinct one-year stand-by arrangements; the number of such arrangements actually considered was relatively small, however, as they oc- curred near the end of the decade and, therefore, the necessary data were often not available (discussed later). Similarly, a succession of stand-by arrangements was treated as a series of independent arrangements. ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 199 the analysis, partly because most of these arrangements were entered into during the latter part of the decade and there were relatively few cases where the program was fully completed and data were available for the post-program period. Also, since the economic content of extended arrangements, in terms of both objectives and policies, should, in principle, be different from that of shorter-term stand-by arrangements, they are deserving of separate analysis. The data for most of the variables examined were generally available only on a calendar year or (in some cases) a fiscal year basis. For many countries, however, the period of the stand-by arrangement often spanned more than one calendar year or fiscal year. In order to deal with this problem, the concept of one or more "program periods" was used in all cases as the basic time period of analysis for stand-by arrangements. In practice, this implies that a one-year stand-by arrangement that came into effect midway through a period covered by one data series (i.e., a calendar year or fiscal year) is viewed as corresponding to two distinct program periods. As a result, the number of program periods or data points covered in the analysis is greater than the number of stand-by arrangements approved during the period. To a certain extent, the use of this technique may tend to understate the actual changes in variables that occurred during the period of the stand-by arrangement.27 The comparative statistical analysis required observations for the variable in question both for the period before the program began and for the program period itself, as well as for the three-year period preceding the program and the three-(or two-) year period beginning with the program period. For some coun- tries, depending on the variable in question, data were either nonexistent or were available only for a limited number of years. In such instances, these program periods were removed from the analysis as necessary, and, as a result, the number of observations differs depending on the variable being analyzed (see the following subsection). For this reason, the data for both 1979 and (especially) 1980 do not include the outcomes of a significant number of stand-by arrange- ments concluded during these years. LISTING OF PROGRAM PERIODS USED FOR EACH VARIABLE The following are the program periods included for each variable; a single asterik (*) indicates that the calculation was available only for the one-year comparison period, while a double asterisk (**) indicates that the post-program calculation referred to a two-year period (this was the case for all 1979 programs and some 1978 programs). In some instances, the listing indicates that the data were on a fiscal year basis (corresponding to the series shown in IFS). Current account balance, savings ratio, and investment ratio Argentina (1976, 1977, 1978*); Bolivia (1973); Burma (1974/75, 1977/78, 1978/79); Chile (1974, 1975); Colombia (1971, 1972); Costa Rica (1980*); Ecuador (1972, 1973); Egypt (1977); Gabon (1978**); Guyana (1978, 1979**); Haiti (1975,1976,1977); Honduras (1971,1972,1973); Israel (1975,1976,1977); Jamaica (1973, 1977); Kenya (1979**, 1980*); Korea (1971,1975,1976,1980*); 27As an illustration, for a stand-by arrangement in effect from midyear to midyear, the actual change in the variable during the one-year arrangement period is distributed among the two adjacent years that are analyzed as separate program periods. ©International Monetary Fund. Not for Redistribution 200 DONAL J. DONOVAN Liberia (1980*); Malawi (1979**, 1980*); Mauritius (1979*); Morocco (1971); Nicaragua (1972); Pakistan (1972/73,1973/74,1974/75,1977/78); Panama (1971, 1978**, 1979*); Peru (1978, 1979**, 1980*); Philippines (1971, 1972, 1973, 1980*); Portugal (1978,1979**); South Africa (1976/77); Sri Lanka (1971,1974, 1978); Sudan (1972/73; 1973/74; 1974/75); Tanzania (1975, 1976); Togo (1979*); Uruguay (1972, 1973); Yugoslavia (1971, 1972); Zaire (1977, 1979**, 1980*); Zambia (1976, 1977, 1978**, 1979*). Overall balance of payments Argentina (1976, 1977, 1978); Bangladesh (1976); Bolivia (1973, 1980*); Burma (1974, 1977, 1978, 1979**); Chile (1974, 1975); Colombia (1971, 1972); Congo (1979**); Costa Rica (1980*); Ecuador (1972, 1973); Egypt (1977); Gabon (1978); Ghana (1979**); Guyana (1978, 1979**); Haiti (1975, 1976, 1977); Honduras (1971, 1972, 1973); Israel (1975, 1976, 1977); Jamaica (1973, 1977); Kenya (1979**, 1980*); Korea (1971, 1975, 1976, 1980*); Malawi (1979, 1980); Mali (1971); Mauritius (1979**, 1980*); Morocco (1971); Nicaragua (1972); Pakistan (1973, 1974, 1977, 1978); Panama (1971, 1978, 1979*); Peru (1978, 1979*); Philippines (1971, 1972, 1973, 1980*); Portugal (1978, 1979*); Somalia (1980**); South Africa (1977); Sri Lanka (1971, 1974, 1978**); Sudan (1973,1974,1975); Tanzania (1975,1976,1980*); Turkey (1978,1979**, 1980*); Uruguay (1972, 1973); Yugoslavia (1971, 1972); Zambia (1976, 1977, 1978, 1979**). Inflation Bangladesh (1976*); Burma (1974, 1977, 1978); Colombia (1971, 1972); Congo (1979**); Costa Rica (1980*); Ecuador (1972, 1973); Egypt (1977); Gabon (1978); Guyana (1978, 1979**); Haiti (1975, 1976, 1977); Honduras (1971,1972,1973); Jamaica (1973,1977*); Kenya (1979**, 1980*); Korea (1971, 1975, 1976, 1980*); Liberia (1980*); Malawi (1979**, 1980*); Mauritania (1980*); Morocco (1971); Pakistan (1972,1973,1974,1975,1977,1978); Panama (1971, 1978, 1979**, 1980*); Philippines (1971, 1972, 1973, 1980*); Portugal (1978, 1979**); Sierra Leone (1979**, 1980*); South Africa (1976, 1977); Sri Lanka (1971,1974,1978); Sudan (1972,1973,1974,1975); Tanzania (1975,1976, 1980*); Togo (1979**, 1980*); Western Samoa (1979**, 1980*); Yugoslavia (1971, 1972); Zambia (1976, 1977, 1978, 1979**). Change in real GDP Argentina (1976,1977,1978); Bolivia (1973,1980*); Burma (1974/75,1977/78, 1978/79); Chile (1974, 1975); Colombia (1971, 1972); Costa Rica (1980*); Ecuador (1972,1973); Egypt (1977); Haiti (1975, 1976, 1977); Honduras (1971, 1972, 1973); Israel, (1975, 1976, 1977); Jamaica (1973, 1977); Kenya (1979**, 1980*); Korea (1971, 1975, 1976, 1980*); Liberia (1980*); Malawi (1979**, 1980*); Morocco (1971); Nicaragua (1972); Pakistan (1972/73,1973/74,1974/75, 1977/78); Panama (1971, 1978, 1979**, 1980*); Peru (1978, 1979**, 1980*); Philippines (1971, 1972, 1973, 1980*); Portugal (1978, 1979**); South Africa (1976/77); Sri Lanka (1971, 1974, 1978); Tanzania (1975, 1976); Turkey (1978, 1979**, 1980*); Uruguay (1972, 1973); Yugoslavia (1971,1972); Zambia (1976, 1977, 1978, 1979*); Zaire (1977, 1979**, 1980*). ©International Monetary Fund. Not for Redistribution TABLE 12. SERIES FOR ALL NON-OIL DEVELOPING COUNTRIES, 1968-80 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Pen:entage of GNP — Current account balance -5.1 -4.2 -5.8 -7.3 -5.5 -5.3 -7.3 -9.8 -6.8 -7.0 -7.2 -8.2 -9.5 Savings 14.2 15.6 15.7 15.0 16.0 16.9 17.3 15.1 17.5 17.8 17.6 17.5 16.1 Investment 19.3 19.7 21.5 22.4 21.4 22.1 24.6 24.9 24.4 24.8 24.8 25.6 25.6 Percent change Real GDP 5.6 6.9 6.1 6.1 5.0 6.3 5.6 4.0 5.4 4.8 5.5 4.9 4.4 Consumer prices 7.9 7.2 8.6 10.3 13.2 22.1 28.7 27.0 27.6 27.1 23.7 28.9 37.7 Real consumption 5.5 5.5 6.4 5.1 5.2 5.3 5.3 4.1 5.6 5.3 4.9 3.2 3.2 Percentage of exports. Overall balance of payments 5.3 4.0 4.5 5.2 14.2 12.2 -0.2 -4.2 6.6 7.3 9.3 4.0 0.8 Sources: International Monetary Fund, International Financial Statistics, various issues, and Annual Report, 1981 (Washington, 1981). For explanations of the derivation of each series, see the text. ©International Monetary Fund. Not for Redistribution 202 DONAL J. DONOVAN Change in real consumption Argentina (1976, 1977, 1978*); Bolivia (1973, 1980*); Burma (1974/75, 1977/78, 1978/79); Chile (1974, 1975); Colombia (1971, 1972); Costa Rica (1980*); Ecuador (1972,1973); Egypt (1977); Guyana (1978,1979); Haiti (1975, 1976, 1977); Honduras (1971, 1972, 1973); Israel (1975, 1976, 1977); Jamaica (1973,1977); Kenya (1979**, 1980*); Korea (1971,1975,1976); Liberia (1980*); Malawi (1979**, 1980*); Morocco (1971); Pakistan (1972/73, 1973/74, 1974/75, 1977/78); Panama (1971,1978**, 1979*); Peru (1978,1979**, 1980*); Philippines (1971, 1972, 1973); Portugal (1978, 1979); Sri Lanka (1971, 1974, 1978); South Africa (1976/77); Sudan (1972/73, 1973/74, 1974/75*); Tanzania (1975, 1976); Togo (1979*); Uruguay (1972, 1973); Yugoslavia (1971, 1972); Zaire (1977, 1979*); Zambia (1976, 1977, 1978**, 1979*). SERIES FOR ALL NON-OIL DEVELOPING COUNTRIES These series are provided in Table 12. REFERENCES Beveridge, W. A., "Fiscal Adjustment in Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1978-79" (un- published, International Monetary Fund, July 1, 1981). , and Margaret R. Kelly, "Fiscal Content of Financial Programs Support- ed by Stand-By Arrangements in the Upper Credit Tranches, 1969-78," Staff Papers, Vol. 27 (June 1980), pp. 205^9. Bird, Graham R., "The IMF and the Developing Countries: Evolving Rela- tions, Use of Resources and the Debate Over Conditionally" (un- published, Overseas Development Institute, March 1981). Connors, Thomas A., "The Apparent Effects of Recent IMF Stabilization Programs," International Finance Discussion Papers, No. 135 (Board of Governors of the Federal Reserve System, April 1979). Dell, Sidney S., On Being Grandmotherly: The Evolution of IMF Condition- ality, Essays in International Finance, No. 144, International Finance Sec- tion, Department of Economics, Princeton University (1981). Donovan, Donal J., "Real Responses Associated with Exchange Rate Action in Selected Upper Credit Tranche Stabilization Programs," Staff Papers, Vol. 28 (December 1981), pp. 698-727. Guitian, Manuel, "Economic Management and International Monetary Fund Conditionality," in Adjustment and Financing in the Developing World: The Role of the International Monetary Fund, ed. by Tony Killick (Washington, 1982), pp. 73-104. Independent Commission on International Development Issues ("Brandt Com- mission"), North-South: A Program for Survival (Cambridge, Massachu- setts, MIT Press, 1980). International Monetary Fund, Annual Report of the Executive Board for the Financial Year Ended April 30, 1981 (Washington, 1981). ©International Monetary Fund. Not for Redistribution PERFORMANCE AND ADJUSTMENT UNDER FUND PROGRAMS 203 Kincaid, G. Russell, "Conditionality and the Use of Fund Resources: Jamaica," Finance & Development, Vol. 18 (June 1981), pp. 18-21. Nowzad, Bahram, The IMF and its Critics, Essays in International Finance, No. 146, International Finance Section, Department of Economics, Prince- ton University (1981). Reichmann, Thomas M., "The Fund's Conditional Assistance and the Problems of Adjustment, 1973-75," Finance & Development, Vol. 15 (December 1978), pp. 38-41. , and Richard T. Stillson, "Experience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Tranches, 1963-72," Staff Papers, Vol. 25 (June 1978), pp. 293-309. Schmitt, Hans O., Economic Stabilization and Growth in Portugal, IMF Occa- sional Paper, No. 2 (Washington, 1981). United Nations Conference on Trade and Development, The Balance of Pay- ments Adjustment Process in Developing Countries: Report to the Group of Twenty-Four, UNDP/UNCTAD Project INT/75/015 (January 1979). Williamson, John, "On Judging the Success of IMF Policy Advice" (unpub- lished, Institute for International Economics, December 1981). ©International Monetary Fund. Not for Redistribution Effects of Inflation Control Programs on Expected Real Interest Rates JOHN H. MAKIN* I. Summary HIS PAPER INVESTIGATES the possible effects upon expected T real interest rates (hereinafter referred to as real rates) arising from programs of monetary restraint. The investigation focuses on the unobservable real rate because it is typically regarded as the mechanism whereby slower money growth results in observ- able changes, such as a rise in nominal interest rates, a slowdown in economic activity, and currency appreciation. Thus, debate over the economic costs and international effects associated with policies to reduce monetary growth centers on the magnitude of their impact on real rates. Concern over the stance of fiscal policy also centers on possible effects on real rates. The expectation that large future deficits will be monetized increases anticipated inflation and thereby increases nominal interest rates. Another view sees large deficits resulting in an increased flow of securities, which will be held only at higher real rates. In turn, the higher real rates will crowd out some private borrowers, thereby depressing private investment and eco- nomic activity. Major findings of this paper fall into three categories: (1) Programs of monetary restraint tend to result in higher real interest rates because when they are initially implemented, they *Mr. Makin, Consultant in the Research Department when this paper was prepared, is Professor of Economics at the University of Washington in Seattle and a Research Associate with the National Bureau of Economic Research. This article represents a part of a large body of work that he has undertaken investi- gating the effects of monetary policy and associated phenomena, both nationally and internationally. He is a graduate of Trinity College (Hartford, Connecticut) and the University of Chicago. 204 ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 205 result in "surprise" monetary stringency. The negative money surprises in the second quarter of 1981 were of sufficient magni- tude to have added an estimated 2 to 3 percentage points to both real and nominal interest rates. (2) An increase in the fiscal deficit can raise the real rate if it raises the ratio of total borrowing to gross national product (GNP), but the usual effect of a larger ratio of the budgetary deficit to GNP is to lower the real rate. This apparent paradox is caused by the fact that total borrowing relative to GNP typically moves inversely with respect to the budgetary deficit relative to GNP, since deficits often rise during recessions, when total demand on credit markets is low. (3) The equation estimated to explain interest rate behavior consistently underpredicts interest rates in 1981. This suggests not only some change in underlying structural relationships but also possible effects of special circumstances, such as the new tax incentives for business and the large projected budgetary deficits in the United States. Overall, the study suggests two general conclusions. First, pro- grams of inflation control involving monetary stringency may pro- duce temporary, largely unavoidable upward pressure on real rates, since the initial measures may come as a surprise in the wake of past expansionary policies. Second, such programs should be implemented with careful attention paid to the implications of fiscal policy for total credit demand. II. Introduction This paper investigates the possible effects upon expected real interest rates arising from programs of monetary restraint and attendant policies. The expected real interest rate (hereinafter referred to as the real rate) is the focus of the investigation, because it typically is seen as transmitting the effects of changes in the money growth rate to the economy. According to this view, slower money growth results in a number of observable changes in important economic variables—including a rise in market or nom- inal interest rates, a slowdown in economic activity, and currency appreciation—and these observable effects can ultimately be traced to the impact of slower money growth on the unobservable real rate. Since policies aimed at controlling inflation involve a reduction in money growth, debate over the economic costs and ©International Monetary Fund. Not for Redistribution 206 JOHN H. MAKIN international effects associated with the control of inflation cen- ters on the magnitude of the attendant positive impact on real rates; an increase in real rates, in turn, results in a slowdown in economic activity or a currency appreciation. Views differ on the magnitude of these by-products of inflation control. On the one hand, those who see prices as highly flexible tend to view "real" variables, such as the real rate, as largely independent of monetary policy, except for very brief periods and, therefore, see lower costs associated with the control of inflation. On the other hand, those who view prices as sticky tend to attribute persistent and sometimes costly real effects, trans- mitted by the real rate, to the monetary restraint associated with programs of inflation control. Concern over the stance of fiscal policy in conjunction with monetary policy also centers on possible effects on the real rate and the attendant costs and international repercussions of the policy mix. An easy fiscal policy that produces large actual and/or expected deficits may raise nominal interest rates for either of two reasons. According to one view, the expectation that large future deficits will be monetized increases anticipated inflation and thereby increases nominal interest rates. According to the alter- native view, large deficits result in an increased flow of securities, which will only be held at higher real rates. In turn, the higher real rates will crowd out some private borrowers, thereby depressing private investment and resulting in the slowdown in economic activity discussed earlier. Those holding the first view tend to argue that deficits will not raise nominal interest rates if the public is convinced they will not be monetized. Those who emphasize the impact of deficits on the real rate argue that slower money growth or nonmonetization of deficits will produce a liquidity shortage, so that higher real rates will be required to squeeze out private borrowers in order for a large quantity of government securities to be sold. Those who see a possible positive impact on the real rate arising from large deficits will clearly be more concerned about negative effects on economic activity associated with crowding out and about a possible export of a slowdown as real rates rise abroad than will those who emphasize the impact on expected inflation. The former see real economic effects associated with larger defi- cits, while the latter see largely nominal effects. In order to investigate the possible costs and international repercussions of a program of monetary stabilization and inflation control, this paper tests a number of hypotheses regarding the ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 207 behavior of the real rate. Specifically, tests of the hypothesis that surprise changes in the money supply are inversely related to the real rate are conducted that simultaneously allow for operation of the Mundell-Tobin effectl of anticipated inflation on the real rate. In addition, the paper tests the hypothesis that larger actual or anticipated government deficits relative to GNP will raise the real rate owing to the crowding out phenomenon. Section III reviews highlights of recent empirical literature investigating behavior of the real rate and describes the methodology to be employed here. Section IV describes the model to be tested, briefly reviews some recent investigations that focus on the effects of monetary shocks on real rates, and discusses the measurement of monetary sur- prises. Results of estimating the model are reported in Section V. Implications of the results for explaining interest rate behavior during 1980-81 are presented in Section VI, and some concluding remarks are presented in Section VII. III. Empirical Investigations of the Expected Real Interest Rate Statistical investigations regarding the possibility of movements in the real rate have appeared with increasing frequency since publication of Fama's (1975) provocative article.2 Nelson and Schwert (1977) argued that Fama's test of the joint hypothesis of market efficiency and constancy of the real rate was not suf- ficiently powerful and, after applying more powerful tests, con- cluded that the data permitted rejection of the hypothesis of con- stancy of the real rate. Other investigations, including those by Hess and Bicksler (1975), Carlson (1977), Garbade and Wachtel (1978), and Levi and Makin (1979), have rejected the hypothesis of constancy of the real rate while tending to support the hypoth- esis that market interest rates include an efficient inflationary premium. More recently, investigators have moved from merely testing the hypothesis of constancy of the real rate to searching for an ^This is defined and discussed in Section IV. 2Long before the investigations discussed here, Irving Fisher reported, based on an investigation of market interest rates during the late nineteenth and early twentieth centuries in London, New York, Berlin, Calcutta, and Tokyo, that "the real rate of interest in terms of commodities is from seven to thirteen times as variable as the market rate of interest expressed in terms of money" (Fisher (1930), p. 415). ©International Monetary Fund. Not for Redistribution 208 JOHN H. MAKIN explanation for the real rate movements suggested by a large body of statistical evidence. Mishkin (1981) has investigated the rela- tionship between the real rate and anticipated inflation suggested by Mundell (1963) and Tobin (1965). Levi and Makin (1979,1981) and Hartman (1981) have considered effects of inflation uncer- tainty on the real rate. Dwyer (1981) has found that the real rate is independent of predictable changes in the money supply. This paper investigates the hypothesis that surprise changes in the money supply are inversely related to the real interest rate, while simultaneously allowing for operation of the Mundell-Tobin effect of anticipated inflation on the real rate.3 Tests are also conducted of the possible positive impact upon the real rate aris- ing from larger government budget deficits. The three novel aspects of the investigation are tests of the hypothesized impact of money surprises on real rates in conjunction with tests of the Mundell-Tobin hypothesis, tests of possible evidence of crowding out associated with larger budget deficits, and estimation employ- ing transfer function methodology developed by Box and Jenkins (1970). The transfer function methodology employed to estimate the empirical relationships investigated in this study has a number of advantages over the usual linear econometric estimation tech- niques. With this methodology, it is possible to entertain any autoregressive (AR), moving average (MA), or combined (ARMA) representation of residuals and to estimate it simulta- neously with relationships between the endogenous and exo- genous variable(s), while the usual methodology allows only itera- tive estimation of a first-order autoregressive process to represent residuals. The transfer function also enables parsimonious repre- sentation of possible distributed lag relationships between the endogenous variable and exogenous variables. It is worth noting that the transfer function in its simplest representation produces estimation results identical to the usual ordinary-least-squares (OLS) methodology with serially uncorrelated residuals. As is well known, however, the standard assumptions required for OLS estimation are often violated; and in such cases, the transfer func- tion technique provides the investigator with a useful and more flexible tool with which to test for empirical relationships. 3Mishkin (1981) found a significant negative impact upon the real rate of a lagged actual (consumer price index) inflation rate taken as a proxy for antici- pated inflation. An autoregressive integrated moving average (ARIMA) (0,1,1) inflation model with a seasonal MA-1 term also provided an expected inflation proxy with a significant negative impact on the real rate. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 209 Overall, the transfer function is reasonably well described as a means to combine time series and structural explanations of behavior of economic variables such as interest rates. Problems encountered in estimation of the impact of monetary surprises and other variables upon real interest (see Section IV) provide a par- ticularly good illustration of its advantages. IV. Natural and Cyclical Components of the Real Rate COMPONENTS OF THE REAL RATE The hypothesis to be tested here involves decomposition of the real rate into a long-run underlying, or natural, component and a short-run cyclical component. The analogy with the decomposi- tion by Lucas (1973) of real output into natural and cyclical com- ponents is obvious. The natural portion of the real rate is determined by the expected marginal productivity of capital and the marginal rate of time preference of consumers.4 The equilibrium natural real rate equates, at the margin, the subjective rate at which investors are willing to exchange current and future consumption, with the rate representing the marginal product of capital—that is, the objective, technological marginal rate of transformation between current and future goods. Under the Mundell-Tobin effect, the natural portion of the real rate can be affected by changes in anticipated inflation. A rise in anticipated inflation causes a shift out of money balances and into real capital, thereby depressing the marginal product of capital and the equilibrium real rate. This is the Tobin effect set out in Tobin (1965). Mundell (1963) describes a similar phenomenon whereby a rise in anticipated inflation depresses equilibrium real cash balances and con- sequently increases the steady-state level of flow saving owing to the real balance effect. Equilibrium is restored by means of a lower real interest rate, which increases the level of investment until it equals the higher level of saving. This effect, operating as it does on the steady-state level of saving, is not expected to be subsequently reversed in the absence of further change in the rate of anticipated inflation. 4Alamouti (1980) provides a similar description of the determination of the real rate. Determination of the real rate in this manner is suggested directly by the full title of Fisher's (1930) classic—The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest it. ©International Monetary Fund. Not for Redistribution 210 JOHN H. MAKIN The hypothesized impact of a money surprise on real interest arises from an assumption of sticky price adjustment. Money growth above its anticipated level results in an excess supply of money if prices are sticky in the short run, assuming also that surprise money growth does not immediately cause a rise in real income sufficient to absorb excess money supply. Until prices adjust fully to absorb the excess money supply, the only alterna- tive is for real interest rates to fall, thereby (ceteris paribus) low- ering nominal interest rates by an amount sufficient to clear the money market.5 The impact of a money surprise on the real rate ought to be temporary, lasting only as long as stickiness of prices prevents adjustment to monetary equilibrium without some adjustment of the real rate. Its duration and existence is an empirical question, the answer to which ought to shed some light on the speed of adjustment of overall prices. The real rate may also be affected by budget deficits. In addi- tion to the possible impact of budget deficits on anticipated infla- tion, a larger budget deficit relative to GNP, which raises overall private and public sector borrowing relative to the GNP proxy for the economy's ability to absorb debt, will require a higher real rate to induce investors to hold a larger real stock of securities. Alternatively, the higher real rate may be viewed as necessary to crowd out private sector borrowing. A higher level of borrowing relative to GNP is hypothesized to increase the cyclical portion of the real rate. More specifically, an increase in the ratio of borrow- ing to GNP creates an excess supply of securities, which, in turn, causes a temporary increase in the real rate. The exact formulation to be investigated here includes the Fisher equation and a hypothesis dividing the real rates into nat- ural and cyclical components (where all rates are continuously compounded). 5This view of dynamic adjustment to monetary shocks is investigated empir- ically for a number of developing countries in Khan (1980). ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 211 where it = nominal interest rate at time t n rt = expected real interest rate (with r t denoting the c natural portion and r t denoting the cyclical por- tion) = surprise money growth measured as the difference between the log of current money supply and the log of the money supply at t anticipated as of t - 16 FDOG = net funds raised in U.S. credit markets divided by GNP7 TT, = anticipated inflation, or the log of the price level at t + 1, as expected at t, less the log of the actual price level, ,pf+l-pt et= an error term, normally distributed with mean zero8 Substituting equation (2) into (1), equations (3) and (4) give an expression for the nominal interest rate in terms of a constant term, anticipated inflation, the ratio of net borrowing to GNP, a money surprise, and an error term9 Equation (5) suggests that regression of nominal interest on a constant, a measure of net borrowing relative to GNP, a money surprise, and anticipated inflation ought to: (1) provide, from the constant term, an estimate of the portion of the natural real rate unaffected by anticipated inflation; (2) test the hypothesized pos- itive impact upon the real rate of a rise in the level of borrowing relative to GNP; (3) test the hypothesized negative impact of a money surprise on the real rate by checking to see if the coeffi- 6Since actual money growth less anticipated money growth is written as (m, - ra,_i) - O-i/n" - ra,_i) = (mt - ,-i/<). Both figures are expressed as seasonally adjusted annual rates. Net funds raised in U.S. credit markets are based on data drawn from the U.S. Federal Reserve Board's Flow-of-Funds Accounts. See Federal Reserve Bulletin, Ta- ble 1.58, "Funds Raised in U.S. Credit Markets," Line 60. 8The nature of the error process is the subject of investigation in Section III. 9Tax effects alluded to by Darby (1975) and Feldstein (1976) are ignored. Mishkin (1981) finds that their inclusion has little impact on conclusions regard- ing non-constancy of the real rate. ©International Monetary Fund. Not for Redistribution 212 JOHN H. MAKIN cient on the surprise is significantly less than zero; and (4) test the hypothesized negative impact of anticipated inflation on the real rate by checking to see if the coefficient on anticipated inflation is significantly below unity. Examination of the impact of lagged values of anticipated inflation and lagged values of borrowing relative to GNP on contemporary nominal interest ought not to indicate subsequent reversal of the initial negative impact. Alter- natively, the hypothesized temporary negative impact of a money surprise ought not to persist, in which case distributed lag coeffi- cients on the money surprise term ought to sum to zero. OTHER INVESTIGATIONS OF MONEY SHOCKS AND REAL RATE The notion being advanced here that monetary shocks cause the real rate to diverge temporarily from its long-run equilibrium value is also investigated in a study by Cornell (1981) that extends the work of Fama and Gibbons (1980). Cornell finds that mone- tary shocks connected with U.S. banks' reserve settlements on Wednesdays cause temporary (one-day) movements in the (Fed- eral funds) real rate of the sort hypothesized previously in equa- tion (3).10 He suggests further that a possible reason for the fail- ure of Fama and Gibbons to detect such effects is prompt action by the Federal Reserve System to offset such shocks. Cornell explicitly recognizes, however, that given "a dramatic shift to a policy of slow, constant growth in the monetary base ... , it may turn out that reserve problems which develop on Wednesday sud- denly have a large and sustained impact on the ex ante real rate" (p. 18). In short, while Cornell's investigation of the impact of monetary shocks on the real rate is conceptually similar to this investigation, his explicit finding of a one-day impact resulting from Wednesday (lagged) reserve settlement shocks says nothing explicit about the possible impact of surprise money growth over one quarter on real rates of return on 90-day Treasury bills investigated here, since he appears to believe that shocks are essentially offset within a day. However, the previous quotation clearly indicates a view that a shock lasting for a quarter would have an impact on the real rate, measured at quarterly intervals. In another related study, Grossman (1981) considers the re- sponse of interest rates on Treasury bills to weekly money supply announcements by the Federal Reserve System. With the change in the bill rate between 3:30 p.m. and 5:00 p.m. on announcement 10Cornell is clearly thinking of shocks to the monetary base in the form of shortages or excesses of bank reserves. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 213 day (Friday) as the dependent variable, Grossman finds a positive link running from money surprises (positive if the increase in the money supply exceeds a consensus, predicted level) to the change in interest rates. This positive relationship reflects, in Grossman's view, "the System's technique of operation," whereby faster money growth results in movement toward the upper bound and causes the public to anticipate tightening by the Federal Reserve System. The positive sign of the relationship between a money surprise and the change in interest rates hypothesized by Grossman is the reverse of the relationship hypothesized by Cornell (1981) and this study. There is, however, no real conflict with the behavior hypothesized here. In effect, Grossman's rationale for this posi- tive relationship is a policy reaction function built into Federal Reserve System operating procedures during the Septem- ber 1977-September 1979 sample period examined. Grossman assumes that money growth above the targeted level would cause the Federal Reserve System to move to raise the federal funds rate and that the public would anticipate such action, thereby bidding up interest rates in anticipation of such a move. While such a response may be possible during a single day for a given policy regime, the findings of Cornell and this study (reported later on) suggest that controlling for anticipated inflation reveals that money growth that is greater than anticipated will temporarily depress the real rate. This results holds for both daily and quar- terly data. MEASUREMENT OF MONEY SURPRISES This study employs residuals from an ARMA (1,5) model11 of 12 money (MrB) growth as money surprises. It would be possible to estimate money surprises using alternative measures of money such as M2 and/or using alternative representations of anticipated money growth such as those linking behavior of the money supply to targets of monetary policy that appear in Barro (1977). While the range of possible measures of money surprises is wide, experi- mentation with a number of conceptually different measures in Makin (1982) produced highly correlated measures (all exceeding nThe first number in parentheses indicates the order of the autoregressive process, and the second number the order of the moving average. 12The chi-square test statistic for the hypothesis that the residuals of the ARMA(1,5) model is 6.84 with 14 degrees of freedom, which implies a signifi- cance level of 0.94. The model was estimated using quarterly data for the period extending from the first quarter of 1959 to the fourth quarter of 1980. ©International Monetary Fund. Not for Redistribution 214 JOHN H. MAKIN 0.90) of money surprises and had little impact upon the results of testing the natural rate hypothesis. There also arises the issue of sample data employed to estimate the model of money supply behavior. If either the form of the ARMA model or the coefficients of a given ARMA model change over time, then forecasts as of time t should employ only data available as of time t. This problem, alluded to by Sheffrin (1979), also appears to be more serious in principle than in practice (see Makin (1982)). It is worth noting here that Khan (1981) uses a far more tractable alternative than Sheffrin's procedure of periodic re-estimation for estimation of surprises using only data that were available to forecasters at the time forecasts were being made. The technique of sequential estimation used by Khan employs the procedure of Brown, Durbin, and Evans (1975) to produce for a given ARMA model a series of any length of updated coefficient estimates, which requires only one matrix inversion to produce the initial ARMA model estimate. This procedure is appealing and can be used with a wide range of data series from which one desires to extract surprises in a logically consistent manner. For postwar U.S. money series, however, it appears that the pro- cedure produces little impact on actual measures of surprises. For the sample period extending from March 1973 to June 1981, a series of M2 surprises estimated using Khan's method was regressed on a surprise series estimated for the identical sample period with ARMA. The result yielded a constant term not sig- nificantly different from zero (£-statistic = +0.97) and an esti- mated surprise coefficient of 0.93, which is only 1.21 standard errors less than unity. The two series are presented later on in Chart 2, a glance at which will reveal the high degree of their correlation. The overall result of careful consideration of alternative mea- sures of postwar U.S. money surprises, which may very well not generalize to other series, is to suggest that in-sample ARMA models serve as well as any. This is a useful piece of information, as it suggests that the simplest method of estimating money sur- prises serves as well as any of the more complex alternatives. PROBLEMS OF IDENTIFICATION AND OBSERVATIONAL EQUIVALENCE An identification problem that can arise in attempting to estimate an equation such as (5) has been elucidated by Buiter ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 215 (1980). His discussion, which is applied largely to implementation of tests of the natural rate hypothesis of Lucas (1973), makes clear the requirement that identification of the parameter describing the impact of a money surprise in equation (5) requires an assumption that money growth is independent of the other vari- ables in the equation. There is also a related problem of "obser- vational equivalence," which is noted by Sargent (1976) and McCallum (1979), whereby it is impossible to distinguish between the hypothesized impacts upon the real rate of (1) money surprises and (2) actual money growth unless money growth is independent of innovations in nominal interest rates. Since there is no unique method of solving this identification problem, this study shall proceed on the assumption that mone- tary innovations cause contemporaneous interest rate innova- tions, rather than vice versa. Independence of actual money growth from contemporary anticipated inflation and borrowing relative to GNP is no stronger an assumption than many of the others required for empirical investigation of this issue. V. Testing for Constancy of Real Rate Results of estimating interest rate equations are presented in three stages. First, results are presented that focus upon the impact of monetary surprises and anticipated inflation; also, im- plications of proper modeling of residuals with the transfer func- tion are discussed. Next, the impact of including the borrowing/ GNP ratio is investigated. Finally, the "best" model is employed to generate post-sample forecasts in order to consider the possi- bility of a recent (since the end of 1980) structural shift in the true parameters of the model describing behavior of interest rates. CORRECTING CORRELATED RESIDUALS Results of estimating interest rate equations excluding the borrowing/GNP variable are presented in Table 1. It is clear from equation (9) that after dealing with the problem of properly modeling residuals, it is impossible to reject the two hypotheses advanced in Section III about behavior of the real rate. A 1 per cent positive money surprise produces a significant negative impact on the real interest rate (estimated to be about 28 basis points), while a 1 per cent rise in anticipated inflation signifi- ©International Monetary Fund. Not for Redistribution 216 JOHN H. MAKIN TABLE 1. MONEY SURPRISES AND REAL INTEREST: FIRST QUARTER 1959-FouRTH QUARTER 1980l (Dependent variable: 3-month Treasury bill rate) Antici- Money pated Equation Constant Surprise 2 Inflation 3 R2 D-W n (6) 2.53 0.756 0.77 0.58 87 (12.38) (17.23) (7) 2.46 -0.424 0.777 0.78 0.67 87 (12.14) (2.21) (17.68) (8) 2.39 -0.138 0.814 0.43 4 86 (4.55) (1.26) ( 7.97) (9) 2.66 -0.277 0.746 0.90 5 88 (5.59) (2.66) ( 7.97) Source: United States, Federal Reserve Bulletin, various issues. figures in parentheses are f-statistics. D-W denotes the Durbin-Watson sta- tistic. 2The money surprise is measured by residuals from an AR-1, MA-5 model of Mi-B growth estimated using quarterly data for the period extending from the first quarter of 1959 to the fourth quarter of 1980. The chi-square test of the hypothesis that residuals are white noise has a significance level of 0.94. Anticipated inflation is based on data supplied by the Federal Reserve Bank of Philadelphia on 6-month inflationary expectations. Interpolation is employed to obtain a quarterly series. 4Equation (8) is estimated with the Cochrane-Orcutt correction for serial correlation (p = 0.725; t = 9.06). 5Equation (9) is estimated as a transfer function. Residuals are modeled by an AR-1; MA-3 model (^-statistics are 5.78, 5.59). A chi-square test fails to reject the hypothesis that the first 24 residuals from equation (9) are white noise at a significance level of 0.55. cantly depresses the real interest rate by an estimated 25 (1 - 0.746 = 0.25) basis points. The relevant test of the hypothe- sized negative impact of anticipated inflation on the real rate is whether the coefficient on IT, is significantly less than unity. The estimated coefficient of 0.746 in equation (9) is 2.71 standard errors less than unity and is significant at the 0.01 level. The significance of employing the transfer function technique to estimate equation (9) can be seen by comparing equations (6) through (8) with equation (9). In equation (6), it is clear that anticipated inflation alone leaves highly autocorrelated residuals (Durbin-Watson statistic = 0.58). Addition of the money surprise term raises the Durbin-Watson statistic somewhat and adds to overall explanatory power but leaves an unacceptably high level of ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 217 indicated autocorrelation in residuals. The usual procedure would be to correct equation (7) for autocorrelated residuals. The result of employing the Cochrane-Orcutt procedure is reported as equa- tion (8). There is a drop in overall significance levels, leaving one to conclude from equation (8) that a money surprise does not produce a statistically significant negative impact on the real rate. However, inspection of the residuals from equation (7) suggests that they are not adequately represented by an ARMA (1,0) model. Estimation of a transfer function (equation (9)) reveals that an ARMA (1,3) model is required to leave white-noise re- siduals. Proper modeling of residuals produces a substantially changed result—namely, that the data do not permit rejection of the hypothesis that a positive money surprise has a negative im- pact on the real rate. This result carries with it the implication that prices are somewhat sticky, at least for a period of up to one quarter. It would, of course, be desirable to provide prior hypotheses regarding implications for estimated parameter values or esti- mated standard errors of mismodeling residuals. Hendry (1977) has investigated the question and found that little can be said about it, particularly where higher-order processes are involved.13 The best operational rule is to model residuals in a way that leaves white-noise residuals and not simply to assume that an ARMA (1,0) representation is correct. POSSIBLE IMPACT OF MONEY SURPRISE ON ANTICIPATED INFLATION It is worth noting that the estimated coefficient on anticipated inflation is little affected by inclusion of a money surprise term. The possibility exists that the level of anticipated inflation may be positively correlated with a money surprise, which, given a nega- tive impact of a money surprise on the real rate, would tend to bias downward the estimated impact of anticipated inflation on nomi- nal interest when the money surprise is omitted from the equa- tion. Such a possibility deserves consideration in the light of a persistent tendency for the estimated impact of anticipated 13Hendry also suggests that identifying the correct order of error autocorrela- tion is more important than the form (AR or MA). More specifically, had the true error process been ARMA (0,1), an ARMA (1,0) would do reasonably well. But since the true process in equation (9) was ARMA (1,3), ARMA (1,0) represents a serious misspecification. ©International Monetary Fund. Not for Redistribution 218 JOHN H. MAKIN inflation upon nominal interest to lie below the value of unity anticipated under the Fisher hypothesis.14 The fact is, however, that, at least for the sample under investigation here, the cor- relation coefficient between anticipated inflation and money sur- prise is only 0.21. The overall implication is that the persistent finding that the estimated coefficient on anticipated inflation is less than unity may well be due to the negative impact of antici- pated inflation on the real rate rather than to bias associated with omission of a money surprise. Failure to entertain this hypothesis led investigators to consider a wide range of alternative expla- nations, including measurement error on anticipated inflation, "fiscal illusion" (Tanzi (1980)), and failure to control adequately for changes in other variables (such as the level of economic activity or the inflation rate) that might also affect the real rate. All of these possible effects may be valid, but it would be use- ful to reconsider them in the light of a possible Mundell-Tobin effect.15 PERSISTENCE OF MONEY SURPRISE AND ANTICIPATED INFLATION EFFECTS If it is found that the impact of a money surprise is not reversed after a quarter or more, the implication is that prices tend to be sticky over a longer period of time. A persistent impact of antici- pated inflation on subsequent real rates would suggest a per- manent impact upon the rate of capital formation under the Mundell-Tobin hypothesis. These possibilities can easily be checked using output from the transfer function estimation pro- cedure. Gross correlations between unexplained changes in the dependent variable and each of the exogenous variables enable one to check on possible distributed-lag relationships. For the money surprise, the chi-square test statistic for cross correlations with 12 degrees of freedom is 14.3 with a marginal significance 14A value above unity is anticipated if tax effects articulated by Darby (1975), Tanzi (1976), and Feldstein (1976) are considered. See Tanzi (1980) for a dis- cussion of these articles and others that investigate the quantitative impact of changing inflationary expectations on nominal interest. Tanzi argues that "fiscal illusion," or failure to account for taxes, may be responsible for lower-than- expected coefficients obtained when nominal interest rates are regressed on anticipated inflation. 15Levi and Makin (1978, 1979, 1981) have investigated a number of these effects in a model including a Mundell-Tobin effect. This paper, however, adds consideration of money surprise effects on the real rate. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 219 value of 0.28. While this result constitutes only a marginal rejec- tion of possible lagged relationships over 12 periods, inspection of the plot of cross correlations reveals that all of the cross cor- relations lie within a range of two standard errors from zero. The most significant cross correlation, at lag 3, did not enter signifi- cantly when added to equation (9). A hypothesis of price sticki- ness for periods of more than one quarter is supported by these findings, whereby the initial downward pressure on the real rate is not subsequently reversed. Such a finding is contrary to the views of many economists regarding the degree of price flexibility. In view of the marginal rejection of a lagged relationship between money surprises and the real rate that was suggested earlier, more investigation may be called for. For now it is worth noting that the (insignificant) lagged cross correlations between the money sur- prise and the unexplained portion of the dependent variable are all positive for the period extending from the first quarter through the third quarter. This suggests a tendency for (negative) effects of the surprise to be erased over a cycle spanning about 9 months. The chi-square test statistic for cross correlations with antici- pated inflation given 12 degrees of freedom is 8.52, which carries a marginal significance value of 0.744. This constitutes a highly significant rejection of a possible lagged relationship between the real rate and anticipated inflation and suggests, as does the Mundell-Tobin hypothesis, that a rise in anticipated inflation has a permanent negative impact on the real rate.16 CONTROLLING FOR OTHER VARIABLES In an earlier study of the effects of anticipated inflation on nominal interest, Levi and Makin (1979, 1981) controlled for the impacts of output growth and inflation uncertainty upon the real rate, finding both to have negative impacts. Bomberger and Frazer (1981) also found that a Livingston measure of inflation17 16The problem of inference here is complicated by the fact that the Mundell- Tobin hypothesis hinges upon the difference of the coefficient of anticipated inflation from unity and not from zero. However, both the incorporation of a change in anticipated inflation into nominal interest and the real impact under the Mundell-Tobin hypothesis are expected to be permanent. This generates a prior hypothesis of persistence with no subsequent reversal that is not contra- dicted by the data. 17That is, the standard deviation across sample participants of the expected rate of inflation as reported in surveys conducted by the Philadelphia Inquirer under the guidance of Joseph Livingston and compiled semiannually by the Federal Reserve Bank of Philadelphia. ©International Monetary Fund. Not for Redistribution 220 JOHN H. MAKIN uncertainty had a significant negative impact on interest rates. More recently, Hartman (1981) has argued that the real rate ought to be defined as the nominal rate minus the expected in- flation rate plus the variance of the inflation rate. This implies a measure of inflation variance on the right-hand side of equa- tion (4) with a coefficient of minus 1. Neither real growth nor inflation uncertainty entered significantly when they were added to equation (9), either separately or together. This result suggests that the money surprise term in equation (9) is capturing the impact on the real rate of inflation uncertainty and output growth. Larger money surprises may well increase inflation uncertainty. The natural rate hypothesis suggests that money surprises raise the level of real output but not its growth rate. However, price stickiness within a quarter or inventory effects may cause money surprise effects on real output growth. The price stickiness requirement is consistent with the finding that a money surprise is inversely related to the real rate. Full reconciliation of the results reported here with earlier investigations will require further in- vestigation but should provide additional insights into short-run real effects of monetary disturbances. INCLUSION OF A MEASURE OF BUDGET DEFICITS IN INTEREST RATE EQUATION As was noted earlier, if budget deficits increase net borrowing relative to GNP (FDOG), the crowding out hypothesis suggests a positive impact of deficits upon the real rate. If, as some analysts suggest, FDOG is positively correlated, via anticipated monetiza- tion of debt, with anticipated inflation, this will impart an upward bias to the estimated coefficient on anticipated inflation when FDOG is omitted from the equation. Equation (10) in Table 2 reports the result of adding FDOG to the interest rate equation. None of the conclusions drawn from discussion of Table 1 is seriously affected. The negative impact of a money surprise on the real rate is slightly reduced, as is the estimated coefficient attached to anticipated inflation. The latter result reflects some positive correlation between anticipated inflation and FDOG. * Based on the estimated coefficient attached to the ratio of net 18Despite some correlation with FDOG, anticipated inflation remains a highly significant explanatory variable in an equation such as (10). The F-statistic for the significance of including anticipated inflation in equation (10) is 14.65, well above the critical value of 7.01 required for significance at the 0.01 level. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 221 TABLE 2. BUDGET DEFICITS AND REAL INTEREST1 (Dependent variable: 3-month Treasury bill rate) Antici- Borrow- Money pated ing/GNP Noise Equation Constant Surprise Inflation (FDOG) R2 Model n (10) 1.30 -0.237 0.711 10.86 0.92 AR-1, 86 (1.58) (2.28) (5.43) (2.89) MA-2,3 (11) -0.14 -0.228 0.378 11.36 0.93 AR-1, 89 (0.03) (2.50) (1.77) (2.93) MA-2,3 (12) 0.0 -0.151 0.490 10.22 0.94 AR-1, 89 (2.09) (2.27) (3.11) MA-1,2 Source: United States, Federal Reserve Bulletin, various issues, figures in parentheses are f-statistics. borrowing to GNP in equation (10), a government deficit accruing at the rate of $100 billion annually that pushed up total borrowing by the full amount of the deficit would raise the 3-month Treasury bill rate by about 68 basis points during the first quarter it was in effect.19 The positive impact would not persist beyond one quarter and would reflect a rise in the real rate. The two-standard-error range of the estimate covers 21 to 116 basis points. These esti- mates should be viewed as upper bounds if it is supposed that during any given period, a rise in government borrowing, in addi- tion to crowding out private investments, is associated with a downward shift in the private borrowing schedule. STRUCTURAL SHIFT It is interesting to investigate the possibility of a structural shift in the estimated relationship just discussed (reported as equa- tion (10) in Table 2). Since the end of 1980, a policy regime change has occurred, at least proximately, on account of the change in the 19It is important to realize that total borrowing relative to GNP—and not the government budget deficit relative to GNP—is included in equation (10). If the budget deficit relative to GNP were to be employed in place of the variable used in equation (10), the estimated coefficient would indicate that larger deficits cause interest rates to fall The reason for this seemingly odd result is that during the 1959-80 sample period, government deficits typically rose in recessions when private borrowing fell. As the latter category is roughly three times government borrowing, the net effect is a reduction in total credit demand. Therefore, a larger government budget deficit is serving as a proxy for a fall in total credit demand, which, in turn, results in a drop in the real rate. ©International Monetary Fund. Not for Redistribution 222 JOHN H. MAKIN United States Administration. In order to test for structural change, equation (10) was re-estimated adding observations for the first three quarters of 1981. The result is given as equa- tion (12). A Chow test of the null hypothesis that the three 1981 observations obey the same relationship as that given by equa- tion (10) yields an F-statistic of 6.68, which is well above the critical value of 4.07 required for rejection of the null hypothesis at the 0.01 level. These results constitute evidence of a structural shift after the end of 1980 in the interest rate equation (10). The nature of the shift becomes clear from examination of the post-sample performance of equation (10) in predicting the inter- est rate. Employing actual values of post-sample exogenous vari- ables, the model consistently and badly underpredicts interest rates during the first three quarters of 1981. As is clear from the upper portion of Table 3, actual interest rates during 1981 lie well above the upper end of the 95 percent confidence range for fore- casts based on the model estimated with data ending in the fourth quarter of 1980. This result seems attributable to parameter change, since actual post-sample values of explanatory variables are used to generate these post-sample forecasts. A policy regime change could affect parameter estimates in an equation like (10). Alternatively, some other exogenous event that put upward pressure on interest rates may have taken place during 1981. In an attempt to distinguish between these two pos- sibilities, equation (10) was re-estimated for "best fit" employing the full sample used to estimate equation (11). The result was a change in the noise model coupled with a reduction in the esti- TABLE 3. MODEL FORECASTS OF INTEREST RATES Forecast Lower Confidence l Upper Confidence For: Limit Forecast Limit Actual Error Origin fourth quarter 1980: out-of -sample First quarter 1981 9.76 11.35 12.94 14.39 3.04 Second quarter 1981 7.93 9.99 12.06 14.91 4.91 Third quarter 1981 8.36 10.50 12.64 15.05 4.55 Origin fourth quarter 1980: in-sample First quarter 1981 12.25 13.66 15.06 14.39 0.73 Second quarter 1981 10.37 12.76 15.15 14.91 2.15 Third quarter 1981 9.87 12.65 15.44 15.05 2.39 Confidence limits are at the 95 per cent, or two standard error, level. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 223 mated impact of a money surprise. The impact of anticipated inflation fell also, compared with the estimate reported in equa- tion (10) for the shorter sample period. The equation (12) model also produced the superior forecasts reported in the lower portion of Table 3, although as in-sample forecasts, they are not strictly comparable with the out-of-sample forecasts above. Still, it ap- pears that some of the out-of-sample forecast errors were due to parameter shifts, possibly reflecting a policy regime change coin- cident with a change in the U.S. Administration. The fact that even after re-estimation using 1981 data, the model continues to underpredict interest rates, with the magni- tude of the error increasing as 1981 goes on, suggests that some exogenous force(s) are operating to push up interest rates. These may include political changes in Europe, the impact of the Eco- nomic Recovery Act of 1981 on expected real returns on invest- ment and on projected future deficits, and the increased uncer- tainty surrounding money surprises and real returns; the last of these factors may cause a rise in the risk premium to be built into observable interest rates, as suggested by Hartman (1981). As more data becomes available, it will be useful to investigate these hypotheses. VI. Recent Behavior of Real and Nominal Interest Rates The association of money surprises and budget deficits with movements in expected real rates of interest suggests that, if one controls for expected inflation, the behavior of such surprises and budget deficits ought to give an indication of the behavior of the unobservable expected real interest rate.20 Inspection of Table 4 suggests that expected inflation rates rose steadily from 1973 through 1974, fell until the end of 1976, and then rose steadily until 1980, after which they dropped by over 1.6 per cent from December 1980 to June 1981. It appears, however, that volatility of expected inflation over the period was moderate (a standard deviation of 1.22 per cent for the December 1972-December 1978 period) and even fell during the June 1979-June 1981 period (to a standard deviation of 1.05 per cent). During the latter period, expected inflation rates were high but fairly stable. 20The term "budget deficits" refers here only to government borrowing that raises the ratio of total borrowing to GNP. ©International Monetary Fund. Not for Redistribution 224 JOHN H. MAKIN TABLE 4. MEAN AND STANDARD DEVIATION OF SIX-MONTH FORECASTS USING DATA AT ANNUAL RATES Standard Deviation Date Mean Cross section Over time December 1972 3.22 0.83 June 1973 4.00 1.31 December 1973 5.17 2.10 June 1974 7.12 2.38 December 1974 7.70 2.32 June 1975 5.64 2.12 1.22 (December 1972- December 1978) December 1975 5.84 1.38 June 1976 5.30 1.30 December 1976 5.23 1.81 June 1977 5.92 1.36 December 1977 5.99 1.23 June 1978 6.40 1.57 December 1978 6.97 1.75 June 1979 8.31 2.35 December 1979 10.14 2.37 June 1980 10.67 2.57 December 1980 10.51 2.58 1.05 (June 1979- June 1981) June 1981 8.86 2.83 Source: Research Department, Federal Reserve Bank of Philadelphia. Charts 1 and 2 and Table 5 suggest a contrast between the level and volatility of money surprises. The mean absolute monetary surprise, which measures the pressure on U.S. expected real inter- est rates, rose sharply after October 1979 for both AfrB and M2. So, too, did the standard deviation of absolute money surprises. Since U.S. nominal interest rates have been highly volatile since October 1979, the implication of Tables 4 and 5 and Charts 1 and 2 is that, at least in view of the behavior of monetary surprises, volatility of expected real interest rates has accounted for more movements of nominal interest rates than has volatility of expected inflation rates. The level of real interest rates in 1980-81 also reflects the pres- sure on credit markets, as measured by the ratio of total borrow- ing to GNP. The ratio was well above its average level for 1959-80 during the period extending from the beginning of 1980 until the third quarter of 1981. (The only exception was the second quarter of 1980, during which credit controls were in effect.) The mean ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 225 CHART 1. Mi-B SURPRISES (AT ANNUAL GROWTH RATES): PRE-SAMPLE ESTIMATION, MARCH 1973-JuNE 1980l (In per cent) Source: United States, Federal Reserve Bulletin, various issues. JThe residual from the ARM A model of money growth, the mean values and standard deviations of which are shown in Table 5. ratio is about 14 per cent, while the average ratio during the period extending from the fourth quarter of 1980 to the second quarter of 1981 was about 18 per cent, or about one standard deviation above the mean. Based on estimates in Table 2, a ©International Monetary Fund. Not for Redistribution 226 JOHN H. MAKIN CHART 2. M2 SURPRISES (Ax ANNUAL GROWTH RATES): MARCH 1973-SEPTEMBER 1981l Source: United States, Federal Reserve Bulletin, various issues. lrThe residual from the ARM A model of money growth, the mean values and standard deviations of which are shown in Table 5. The pre-sample and in- sample methods are described in Section IV. change of 4 per cent in the ratio would raise the real rate by about 40 basis points. Part of the reason for the atypically high level of the ratio of total borrowing to GNP during this period was the ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 227 TABLE 5. ABSOLUTE MEAN AND STANDARD DEVIATION OF U.S. MONETARY SURPRISES 1 2 3 M i-B J!tf2 Standard Standard Time Period Mean deviation Mean deviation March 1973-October 1978 3.34 2.38 2.61 2.19 October 1978-July 1981 6.84 5.74 3.30 3.16 March 1973-September 1979 3.56 2.56 2.45 2.10 October 1979-July 1981 8.21 6.27 4.21 3.49 lumbers are expressed as annual percentage rates. They were calculated using seasonally adjusted monthly data. Surprises measured by residuals from an AR-3 model of Afi-B growth estimated over the period extending from January 1965 through February 1973 and updated monthly through July 1981. See Khan (1981). Surprises measured by residuals from an AR-1 model of M2 growth estimated over the period specified in footnote 1. unusual coincidence of a rise in fiscal deficits (government de- mand for credit) and a strong private demand for credit. Some of the most intense upward pressure on real interest rates in the United States appears to have materialized during the sec- ond quarter of 1981. Charts 1 and 2 suggest that an additional reason for this is a sequence of negative money surprises during that time. It appears that in the wake of the very large negative, and then positive, monetary surprises inherent in the imposition and subsequent removal of credit controls during 1980, another sequence of surprises—this time positive-negative ones—materi- alized in the first half of 1981. Added to negative money surprises was the impact of the strong demand for credit just discussed. This combination of factors tended to create a situation in which high (real) interest rates were more likely to be linked to budget deficits. In addition to the persistent upward pressures exerted by higher-than-normal total borrowing demands, forces operating on nominal interest rates during the first half of 1981 can be described in terms of events affecting expected inflation rates and expected real interest rates. Election of a new president and expectations of budget-balancing and/or monetary control tended to lower ex- pected inflation over the first six months of 1981 (see Table 4). The brief acceleration of money supply growth above expected levels tended to depress real interest rates during the first quarter of 1981; consequently, nominal interest rates, particularly short ©International Monetary Fund. Not for Redistribution 228 JOHN H. MAKIN rates, fell during the first quarter of 1981. However, an apparent "mini-accord" at the end of March 1981 between the U.S. Trea- sury and the Federal Reserve System sharply increased pressure on the latter to keep monetary aggregates, then above target, at or below targeted levels. The result was a sharp deceleration of money growth during the second quarter of 1981 that came as a surprise to most observers (see Charts 1 and 2). Such large nega- tive surprises put strong upward pressure on expected real interest rates, swamping the depressing impact of lower inflationary ex- pectations. Most of the drop in inflationary expectations may have come during the first quarter of 1981, so that most of the sharp rise in expected real interest rates (estimated, based on Tables 1 through 5, to be between 2 and 3 per cent) that took place during the second quarter was transmitted directly to nominal rates with- out being offset by expectations of decreased inflation. VII. Concluding Remarks This paper has tested the hypotheses that money surprises and anticipated inflation are inversely related to the expected real rate of interest while total credit demand relative to GNP is positively related to the real rate. The results obtained, which are based on quarterly data for the period extending from the first quarter of 1959 to the fourth quarter of 1980, fail to reject any of these hypotheses. An examination of the behavior of money surprises before and after institution of new operating procedures by the Federal Re- serve Board in October 1979 indicates sharp increases in both the level and volatility of such surprises. The results reported here— which indicate that there was increased volatility of money sur- prises when the volatility of anticipated inflation had, if anything, decreased since October 1979—suggest that since October 1979, movements of nominal interest rates have been influenced more by changes in expected real interest rates than by changes in anticipated inflation.21 This would explain Hodrick's (1981) ob- servation of a change in the sign of the observable relationship between nominal interest differentials and exchange rates that has been prevalent since October 1979, as well as the apparent failure 21A similar suggestion has been advanced in Keran and Pigott (1980 a) and (1980 b). ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 229 of nominal interest rates to respond to the drop in inflationary expectations during the first half of 1981. In addition to the impact of money surprises on the level and volatility of real interest rates, the persistence of heavy demands on the credit markets created by an unusual coincidence of high levels of private and public sector borrowing kept real rates higher than they otherwise would have been during 1980-81. The primary implication for monetary policy of the findings reported here is that the result of Fama and Gibbons (1980), whereby a sudden transition to a sharply reduced growth rate of the money base would reduce short-term nominal rates, may not be valid. On the contrary, empirical findings reported in Sec- tion V suggest that, unless a negative money surprise results in an instantaneous and equal percentage decrease in inflationary ex- pectations, the overall result will be an increase, at least tempo- rarily, in the nominal rate owing to an increase in the real rate. Such an increase appears likely, since no such close relationship between money surprises and anticipated inflation is evident from the data examined here. Added to this result is the finding that easy fiscal policy that results in higher actual or anticipated budget deficits and in heav- ier total demands on credit markets will, in conjunction with a surprise decrease in money growth, produce abnormally high real rates, such as those that materialized during the second quarter of 1982. It should be noted, however, that large budget deficits per se may not typically increase total credit demand, since they usu- ally arise during recessions, when total demand for credit is low. In general, a program of inflation control that involves mone- tary stringency may produce some temporary, largely unavoidable upward pressure on real rates, since the stringency necessary to cut inflation may come as a surprise in the wake of past expan- sionary policies that created the need for a program of inflation control. Such programs should, however, be implemented with careful attention paid to the implications of fiscal policy for total credit demand. Increase in fiscal deficits that occur when private demand for credit is already strong will increase total credit de- mand, which, in conjunction with negative money surprises, will create intense—though temporary—upward pressure on real rates. In sum, the risk of a slowdown in economic activity and the international repercussions associated with inflation control pro- grams can be minimized, though probably not eliminated, if a ©International Monetary Fund. Not for Redistribution 230 JOHN H. 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Fama, Eugene F., "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, Vol. 65 (June 1975), pp. 269-82. , and Michael Gibbons, "Inflation, Real Returns, and Capital Invest- ment" (unpublished, Graduate School of Business, University of Chicago, 1980). Feldstein, Martin, "Inflation, Income Taxes, and the Rate of Interest: A The- oretical Analysis," American Economic Review, Vol. 66 (December 1976), pp. 809-20. Fisher, Irving, The Theory of Interest (New York, 1930). Garbade, Kenneth, and Paul Wachtel, "Time Variation in the Relationship between Inflation and Interest Rates," Journal of Monetary Economics, Vol. 4 (November 1978), pp. 755-65. ©International Monetary Fund. Not for Redistribution INFLATION CONTROL PROGRAMS AND REAL INTEREST RATES 231 Grossman, Jacob, "The 'Rationality' of Money Supply Expectations and the Short-Run Response of Interest Rates to Monetary Surprises," Journal of Money, Credit and Banking, Vol. 13 (November 1981), pp. 409-24. Hartman, Richard, "On the Appropriate Definition of the Real Rate of Inter- est" (unpublished, University of Washington, October 1981). Hendry, David F., "Comments on Granger-Newbold's Time Series Approach to Econometric Model Building' and Sargent-Sims' 'Business Cycle Mod- eling Without Pretending to Have Too Much A Priori Economic Theory,'" in New Methods in Business Cycle Research: Proceedings from a Confer- ence, ed. by Christopher Sims (Federal Reserve Bank of Minneapolis, 1977), pp. 183-202. Hess, Patrick J., and James L. Bicksler, "Capital Asset Prices Versus Time Series Models as Predictors of Inflation: The Expected Real Rate of Inter- est and Market Efficiency," Journal of Financial Economics, Vol. 2 (De- cember 1975), pp. 341-60. Hodrick, Robert J., "Exchange Rates, Nominal and Real Interest Rates, and the Role of Monetary Policy" (unpublished, International Monetary Fund, July 1981). Keran, Michael, and Charles Pigott (1980 a), "Interest Rates and Exchange Rates: I (The Relationship)," Federal Reserve Bank of San Francisco, Weekly Letter (September 12, 1980), pp. 1-3. (1980 b), "Interest Rates and Exchange Rates: II (Policy Implica- tions)," Federal Reserve Bank of San Francisco, Weekly Letter (September 19, 1980), pp. 1-3. Khan, Mohsin S., "Monetary Shocks and the Dynamics of Inflation," Staff Papers, Vol. 27 (June 1980), pp. 250-84. , "Estimating Models of Expectations: A Simplified Sequential Ap- proach" (unpublished, International Monetary Fund, July 1981). Levi, Maurice D., and John H. Makin, "Anticipated Inflation and Interest Rates: Further Interpretation of Findings on the Fisher Equation," Amer- ican Economic Review, Vol. 68 (December 1978), pp. 801-12. , "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest," Journal of Finance, Vol. 34 (March 1979), pp. 35-52. -, "Fisher, Phillips, Friedman and the Measured Impact of Inflation on Interest: A Reply," Journal of Finance, Vol. 36 (September 1981), pp. 963-69. Lucas, Robert E., Jr., "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, Vol. 63 (June 1973), pp. 326-34. Makin, John H., "Anticipated Money, Inflation Uncertainty and Real Eco- nomic Activity," Review of Economics and Statistics, Vol. 64 (February 1982), pp. 126-34. McCallum, Bennett, "On the Observational Inequivalence of Classical and Keynesian Models," Journal of Political Economy, Vol. 87 (April 1979), pp. 395-402. ©International Monetary Fund. Not for Redistribution 232 JOHN H. MAKIN Mishkin, Frederic S., "The Real Interest Rate: An Empirical Investigation," in The Costs and Consequences of Inflation, ed. by Karl Brunner and Allan H. Meltzer, Carnegie-Rochester Conference Series on Public Policy, Vol. 15 (Amsterdam, 1981), pp. 151-200. Mundell, Robert A., "Inflation and Real Interest," Journal of Political Econ- omy, Vol. 71 (June 1963), pp. 280-83. Nelson, Charles R., and G. William Schwert, "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis that the Real Rate of Interest is Constant," American Economic Review, Vol. 67 (June 1977), pp. 478-86. Sargent, Thomas J., "The Observational Equivalence of Natural and Unnatural Rate Theories of Macroeconomics," Journal of Political Economy, Vol. 84 (June 1976), pp. 631-40. Sheffrin, Steven M., "Unanticipated Money Growth and Output Fluctuations," Economic Inquiry, Vol. 17 (January 1979), pp. 1-13. Tanzi, Vito, "Inflation, Indexation and Interest Income Taxation," Banco Na- zionale del Lavoro, Quarterly Review, Vol. 29 (March 1976), pp. 64-76. , "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, Vol. 70 (March 1980), pp. 12-21. Tobin, James, "Money and Economic Growth," Econometrica, Vol. 33 (Octo- ber 1965), pp. 671-84. ©International Monetary Fund. Not for Redistribution An Analysis of Exchange Market Intervention of Industrial and Developing Countries MICHAEL DOOLEY* HERE is A wide range of views among governments con- Tcerning the usefulness and limitations of exchange market intervention policy. The objective of this paper is to provide a framework that can help identify and, to a limited extent, evaluate the basis for this range of views. The first step in developing this framework is to propose a definition of exchange market intervention. It is argued in the next section that intervention policy can only be usefully defined and evaluated in the context of a model of exchange rate deter- mination. Since no widely accepted model is yet available, this paper sets out a simple model designed to highlight the possible independent contribution of exchange market intervention to eco- nomic policy. The model suggests that intervention policy can be usefully defined as management of the currency composition of interest-bearing public debt. Following this definition, exchange market intervention in- cludes any government transaction, or set of transactions, that changes the relative supplies of official nonmonetary debt denom- inated in different currencies held by the private sector. Changes in the supply of domestic or foreign money held by the private sector, which are often associated with the mechanics of official transactions in exchange markets, are assumed to be offset by *Mr. Dooley, Assistant Chief of the Developing Country Studies Division of the Research Department, is a graduate of Duquesne University, the University of Delaware, and Pennsylvania State University. The author would like to thank colleagues in the Fund as well as Arturo Brillembourg and Peter Isard for helpful comments on an earlier draft of this paper. 233 ©International Monetary Fund. Not for Redistribution 234 MICHAEL DOOLEY appropriate purchases or sales of nonmonetary debt. An advan- tage of this definition of intervention is that it permits a clear distinction to be drawn between monetary policy and exchange market intervention policy. Throughout the analysis, it should be remembered that this paper is not questioning the widely held view that monetary policy is probably the single most important determinant of exchange rates. Nor does it address the important question of the role that the exchange rate or exchange market conditions might play in formulating monetary policy.1 What it does address is the fact that a government, inclusive of the monetary authority, can be thought of as making two decisions concerning its financial balance sheet. First, it must decide what part of its debt will take the form of base money; this will be referred to here as "monetary policy." Sec- ond, the government must decide in what currency the balance of its nonmonetary debt will be denominated; we call this "inter- vention policy." This framework is based on the observation that governments are not free to alter the currency denomination of their base money. No country allows other governments (or pri- vate counterfeiters) to issue monetary liabilities denominated in its currency, nor would a government fail to offset any substantial holdings of its base money by another government. Governments, however, do hold and issue interest-bearing debt denominated in foreign currencies. Although the mechanics and forms of exchange market inter- vention transactions vary from country to country and over time, this simple framework for evaluating a government's financial balance sheet provides a complete summary of its exchange mar- ket intervention policy.2 Note that our definitions of monetary policy and exchange market intervention policy do not depend upon the intent of the governments involved, the exchange rate regime (i.e., fixed or floating), or the particular mechanisms em- ployed to alter the government's balance sheet. The independence of our definitions of policy tools from the intent of the government is particularly important. A more con- 'See Fischer (1977), Boyer (1978), Roper and Turnovsky (1980), and Frenkel and Aizenman (1981) for studies that address this question. In these studies, foreign exchange market intervention is defined as changes in the monetary base motivated by exchange rate changes. The framework developed in this paper would define such transactions as monetary policy regardless of the motivation behind the transactions. 2See Balbach (1978) for a summary of several types of intervention trans- actions. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 235 ventional definition of exchange market intervention might in- clude transactions in which changes in the monetary base are generated by sales or purchases of foreign exchange reserves. This definition is often associated with models in which assets denom- inated in different currencies are assumed to be perfect substi- tutes. In this framework, changes in the monetary base that result from purchases or sales of domestic securities are identical to exchange market intervention in terms of their effects on interest rates and exchange rates. The only distinction between inter- vention policy and "domestic" open market operations is that the former is a response to exchange rate objectives while the latter might be directed toward other policy objectives. An important insight gained from this framework is that if securities denomi- nated in different currencies are perfect substitutes, the govern- ment has only one policy tool at its disposal and cannot attain both an exchange rate objective and an independent objective for an- other endogenous variable, such as an interest rate or the mon- etary base. A shortcoming of this framework is that it draws attention away from the fact that if securities denominated in different currencies are not perfect substitutes, changes in the mix of government securities denominated in different currencies will affect interest rates and exchange rates even if the monetary base is unchanged. Moreover, by focusing on the impact of exchange market inter- vention on the monetary base, analysts have concluded that ex- change market intervention policies of developed countries have continued to play an important role in these countries' economic policies.3 However, as shown in Section II, the framework devel- oped in this paper reveals a clear change in the policies of several industrial countries after the demise of the fixed exchange rate system in early 1973. In fact, several major industrial countries have virtually suspended their use of exchange market inter- vention policy, as defined in this paper, since the introduction of managed floating exchange rates. Although interest in management of the maturity of public debt (what might be called closed economy debt management policy) has faded in recent years, it is possible that the currency denom- ination of public debt is an important policy tool. A necessary, but not a sufficient, condition for the effectiveness of both closed and open economy debt management policy is that the financial assets 3See, for example, Dooley (1979) and Mussa (1981). ©International Monetary Fund. Not for Redistribution 236 MICHAEL DOOLEY involved be imperfect substitutes in the portfolios of private wealth holders. If the nonmonetary assets bought and sold by governments are perfect or nearly perfect substitutes, debt man- agement policies will not measurably affect market prices and therefore cannot contribute to policy objectives. In the context of domestic debt management policy, empirical studies have largely failed to support the view that changes in the relative supplies of long-maturity and short-maturity nonmonetary debt influenced the spread between long and short interest rates.4 Given this result, there was no point in pursuing the impact that "twisting" the yield curve would have on policy objectives. The analogous problem for exchange market intervention policy is to test the hypothesis that nonmonetary financial assets denominated in different currencies are imperfect substitutes. If assets denominated in different currencies are imperfect substi- tutes, changes in relative supplies generated by exchange market intervention would require changes in the relative expected yields in order to restore equilibrium. In general, a change in the equi- librium level of relative expected yields would be accompanied by changes in both current exchange rates and expected paths for future exchange rates. While the nature of the exchange rate adjustments depends upon a number of further considerations, it is well known that any policy that alters real expected yields can have a powerful impact on the level of spot exchange rates.5 The possibility that changes in expected yields generate changes in exchange rates that exceed, or "overshoot," changes in the long- run expected value of the exchange rate sharpens one's interest in the imperfect substitutes hypothesis. The model developed in Sec- tion I is designed to explore the possibility that outside debts of governments are imperfect substitutes owing to either political or exchange risk. If assets issued by different governments are imper- fect substitutes owing to political risk, changes in external indebt- edness that accompany current account imbalances may have powerful effects on exchange rates, even if there is no change in the currency denomination of outside assets. It follows that empir- ical tests of the effectiveness of intervention policy must carefully distinguish between changes in the external indebtedness of dif- 4See Baker (1979) for a review of this literature. 5See Dornbusch (1976) and Isard (1981) for models in which changes in expected yields on assets denominated in different currencies generate changes in spot exchange rates. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 237 ferent countries and changes in the stock of outside debt denom- inated in a given currency. A review of existing empirical work in Section II suggests that the expected rates of return on assets that are identical except for their currency denomination do appear to vary over time. These differences in expected yields, often referred to as exchange risk premiums, are consistent with the hypothesis that government debts denominated in different currencies are imperfect substi- tutes. There are, however, other plausible explanations for the observed yield differentials. Moreover, studies that have at- tempted to link changes in risk premiums to official foreign ex- change market intervention have met with limited success. Thus, one cannot rule out the possibility that intervention can have a predictable impact on policy objectives, but the case is far from established. In Section III, this paper presents estimates for exchange mar- ket intervention activity for a large number of industrial and de- veloping countries. A surprising implication of these estimates is that exchange market intervention policies of several major indus- trial countries since 1973 have generated only minor changes in the relative supplies of bonds denominated in these countries' currencies. However, developing countries and smaller industrial countries have employed this policy tool more extensively, in that an increasing share of their total net debt has been denominated in foreign currencies. Moreover, since this foreign currency debt is largely denominated in major currencies, the intervention poli- cies of developing countries have generated relatively large changes in the relative supplies of bonds denominated in the currencies of major industrial countries. The failure of existing empirical work to establish a link between intervention policies of industrial countries and yield differentials or exchange rates among their currencies might be due to the failure to model the effects of third country intervention policies. While a multi- country framework may be necessary in order to test the im- portance of exchange market intervention policy, data for the intervention activities of developing countries are currently avail- able only on an annual basis for a few years; such limitations mean that formal hypothesis testing is of little value. In the concluding section, two objectives are suggested that seem to be consistent with observed exchange market interven- tion policies. First, intervention policy might contribute to the objective of minimizing the expected real costs of servicing a ©International Monetary Fund. Not for Redistribution 238 MICHAEL DOOLEY country's public debt. This might be an important factor in under- standing the intervention policies of developing countries. Sec- ond, exchange market intervention might be useful at times when the government's forecasts for exchange rates are different from the private sector's forecasts that are embodied in market ex- change rates. Since a difference of opinion between the govern- ment and the private sector would presumably narrow as events unfolded, there is a strong presumption that such intervention would be reversed so as to return to the long-term debt manage- ment strategy described earlier. This second objective of interven- tion policy may be important to industrial countries. Intervention policies based on either of these objectives might be important determinants of exchange rates. I. A Portfolio-Balance Model with Political Risk and Exchange Rate Risk In order to address the policy of exchange market intervention, a model of the financial sector of an open economy is developed in this section.6 The model can be simplified by assuming that various financial assets are perfect substitutes or that the country considered is small enough so that it is a price taker in both financial and goods markets. As is discussed later on, such as- sumptions have proven useful in focusing on several important aspects of exchange rate determination. However, the ineffec- tiveness of intervention policy, as defined in this paper, follows directly from these simplifying assumptions. A financial sector that provides testable hypotheses concerning the effectiveness of exchange market intervention policy involves two countries—the United States and the Federal Republic of Germany—and three outside financial assets issued by the gov- ernment of each country. The assets are the following: M= dollar money issued only by the U.S. Govern- ment 5[75$ = dollar-denominated securities issued by the U.S. Government 'The model is an extension of portfolio-balance models developed by McKin- non (1969), Girton and Henderson (1973), and others. See Henderson (1982) for an analysis of intervention policy in which a similar financial sector is a com- ponent of a more complete model. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 239 BUS DM = deutsche mark-denominated securities issued by the U.S. Government M* = deutsche mark money issued only by the German Government BGDM = deutsche mark-denominated securities issued by the German Government BG$ = dollar-denominated securities issued by the Ger- man Government The demands for these assets are assumed to be different for residents of the two countries. Two types of risk are associated with a given financial asset. First, exchange risk is associated with uncertain outcomes for future exchange rates.7 Second, political risk is associated with the possibility that a government will de- fault on, or penalize, net nonresident holdings of financial claims on domestic residents. In order to deal with a six-asset financial sector, it is necessary to impose some simplifying assumptions. A potentially useful as- sumption is that private wealth holders make separable decisions concerning the share of their bond portfolios denominated in each currency and the share of net claims on each country. This is a strong assumption, in that it requires, among other conditions, that exchange risk be independent of political risk.8 Separability implies, for example, that sales of deutsche mark-denominated bonds against dollar-denominated bonds issued by the United States Government that are offset by sales of dollar-denominated bonds against deutsche mark-denominated bonds issued by the German Government would not generate changes in market yields. This is because political risk would not change, since the net indebtedness of both governments would not change, and exchange risk would not change since the global supply of deutsche mark-denominated and dollar-denominated outside bonds would not change. Our assumption also suggests the follow- ing restrictions on yield differentials: 7See Kouri (1976) and Dornbusch (1980) for models of utility-maximizing portfolio selection in the presence of exchange risk. 8In addition to independence, further strong assumptions are necessary con- cerning the behavior of wealth holders. See Cass and Stiglitz (1970) for a dis- cussion of the conditions under which separability can be assumed. ©International Monetary Fund. Not for Redistribution 240 MICHAEL DOOLEY Equations (1) and (2) state that the interest rate differentials between dollar-denominated and deutsche mark-denominated securities that carry the same political risk—that is, those issued by the same government—will be the same and will equal the expected change in the spot exchange rate plus the exchange risk premium. These two equations can be interpreted as a covered- interest-rate-parity condition that is known to hold for Eurocur- rency deposits that carry the same political risk.9 It follows that the interest rate differential defined in equations (1) and (2) will always be equal to the market forward exchange rate. In this model, forward exchange market intervention by a government is exactly equivalent to a sale of its dollar-denominated security for its deutsche mark-denominated security, or the reverse. Thus, forward exchange market intervention is equivalent to a trans- action that changes the relative supplies of two of the four bonds already defined in the model. It is important to note that private sector transactions in the forward exchange market that do not involve governments merely transfer the existing stock of outside exchange risk associated with the existing stock of outside govern- ment bonds.10 There is no independent market-clearing condition for the forward exchange rate. Equations (3) and (4) state that the interest rate differentials between bonds issued by the U.S. and German governments that carry the same exchange risk—that is, those denominated in the same currency—are the same and are equal to the differential expected rate of default plus the differential political risk pre- mium a. Political risk is associated with the probability that a government will force complete or partial default on domestic debt held by nonresidents. It is also assumed that the risk of default is the same, regardless of the currency denomination of the debt. For simplicity, it is assumed that only net indebtedness is subject to political risk. That is, in the event of partial or total default, the holders of claims on the defaulting country will be compensated to the extent that other domestic residents have liabilities to the defaulting country. 9See Aliber (1973) and Frenkel and Levich (1975). 10More generally, this paper follows the conventional assumption that private financial positions in various currencies net to zero, so that market-clearing conditions include only government-issued outside financial assets. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 241 Conditions (l)-(4) allow a considerable simplification of the financial sector of the model. U.S. residents' demand for claims on German residents is viewed as depending on the relative rates of return on bonds denominated in the same currency issued by the German and U.S. governments and upon U.S. wealth (mea- sured, for consistency, in deutsche mark): Substituting equations (3) and (4) into (5) yields where E%D denotes the mean probability of default, which is viewed as depending upon net indebtedness of German residents, and a denotes the political risk premium associated with the net indebtedness of German residents. U.S. residents' demand for deutsche mark-denominated bonds is viewed as depending upon the yield differential between deutsche mark-denominated and dollar-denominated issues of both governments. B™=g(RGDM - RG$, RUSDM - RUS$, Wus) (7) Substituting equations (1) and (2) into (7) yields where E%X denotes the expected annual rate appreciation of the deutsche mark against the dollar and € denotes the exchange risk premium necessary to induce the private sector to hold the exist- ing stock of dollar-denominated and deutsche mark-denominated bonds. A similar derivation for German residents yields There are now two market-clearing conditions. For bonds is- sued by the German government And for deutsche mark-denominated bonds issued by both governments n1 "Since data are not available on the net positions of U.S. and German residents denominated in dollars and marks, this paper will ignore the effect of ©International Monetary Fund. Not for Redistribution 242 MICHAEL DOOLEY The market-clearing conditions (11) and (12) tell an interesting story about asset demand in a world where political risk is inde- pendent of exchange risk. Equation (11) states that the demand for bonds issued by the German government depends upon the difference between market interest rates on deutsche mark- (or dollar-) denominated bonds issued by the German Government and deutsche mark- (or dollar-) denominated bonds issued by the U.S. Government, adjusted for the expected loss owing to default and the risk premium, if any, necessary to induce wealth holders to hold the existing stock of securities subject to political risk. Condition (12) states that the demand for deutsche mark- denominated bonds issued by both the U.S. and German govern- ments depends upon the difference between interest rates on deutsche mark-denominated bonds issued by the Federal Repub- lic of Germany (United States) and dollar-denominated bonds issued by the Federal Republic of Germany (United States), ad- justed for the expected change in the exchange rate and the ex- change risk premium, if any, necessary to induce wealth holders to hold the existing supply of deutsche mark-denominated outside debt. For both market-clearing conditions, the distribution of world wealth between U.S. and German residents is important if, as we would expect, their demand functions are different. Exchange market intervention policy does not directly affect condition (11) since this is the market-clearing condition for each government's net debt, and intervention changes only the cur- rency composition of the debt but not its level. Intervention does directly affect condition (12), since a change in the relative supply of deutsche mark-denominated and dollar-denominated bonds requires a change in the relative expected yields on these assets. If the model were extended to include three or more countries, political risk premiums would be determined by each country's net external debt, but exchange risk premiums would be deter- mined by the global supply of net government debt denominated in each currency. It follows that the measure of exchange market intervention policy that was relevant to a given pair of currencies changes in the spot exchange rate on wealth in both equations (11) and (12). For discussion of the role of revaluation of wealth resulting from changes in exchange rates, see Henderson and Rogoff (1982). ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 243 would not be restricted to the balance sheets of the two govern- ments that issued the currencies. POSSIBLE SIMPLIFICATIONS OF FINANCIAL SECTOR The financial sector that has been developed here is sufficiently general to encompass a variety of models developed in recent years, which can be viewed as special cases. Our primary objective in reviewing other models is to see what, if anything, can be said about exchange market intervention policy in more streamlined versions of the model. A large number of papers associated with the monetary ap- proach to the balance of payments are based on the assumption that securities denominated in different currencies and issued by different governments are perfect substitutes.12 The simplest of such models deals with a small, open economy and assumes fixed exchange rates. In such a model, there is only one bond market, and since the country considered is "small," the interest rate necessary to clear the bond market is unaffected by disturbances originating in the small country. In terms of the model developed here, all of the right-hand-side variables in equations (l)-(4) are set at zero, so that there is one world interest rate that is ex- ogenous to the small country. In such a model, exchange market intervention as defined in this paper is, by assumption, a trivial policy. In flexible exchange rate versions of the monetary model, wealth holders are assumed to be insensitive to exchange risk and political risk, so that equations (l)-(4) can be simplified to where the large country interest rate, /?[/£$, is exogenous and the small country rate, RGDM, is sensitive to changes in the small country money supply. If prices in the small country are assumed to adjust slowly, an unexpected change in the money supply can change the real interest rate and, in turn, generate exchange rate changes that overshoot their long-run equilibrium level. While the flexible exchange rate model is somewhat more complex than the fixed exchange rate model, there is still, by assumption, no scope for exchange market intervention in this model.13 12See Frenkel (1976), Hodrick (1978), and Bilson (1979). 13See Dornbusch (1976). ©International Monetary Fund. Not for Redistribution 244 MICHAEL DOOLEY Another class of models assumes that assets denominated in different currencies are imperfect substitutes but that political risk is not a factor in portfolio decisions. Conditions (l)-(4) then can be summarized as where €, which denotes the exchange risk premium, depends in part upon the stocks of dollar and deutsche mark bonds out- standing and the distribution of wealth between U.S. and German residents.14 This model has quite striking implications for intervention pol- icy. It is generally assumed in such models that residents of the different countries have different demands for assets denominated in various currencies, so that equation (12) takes the form given earlier. In such a model, intervention changes the stock of deutsche mark-denominated and dollar-denominated bonds that the private sector is forced (at market-clearing prices) to hold. A change in BDM relative to 5$, holding the total world bond supply and world wealth constant, requires a change in €, so that the expected yield on the reduced supply of BDM falls. A current account imbalance shifts wealth from U.S. to Ger- man residents. For example, a U.S. current account deficit implies a transfer of wealth from U.S. residents to German residents. If German residents have a relatively stronger preference for deutsche mark-denominated bonds, the world demand for deutsche mark bonds will rise and, other things being equal, the expected yield on deutsche mark bonds will fall. The interesting point is that there is always some intervention policy that will exactly offset the change in expected yields generated by a current account imbalance. It follows that a current account deficit will not affect exchange rates as long as the deficit government is expected to supply the foreign-currency-denominated bonds necessary to satisfy the portfolio preferences of foreign wealth holders. Models assuming that all current account imbalances necessarily result in increased holdings of foreign-currency- denominated financial assets by residents of the surplus country avoid this problem, but they are implicitly based on the assump- tion that governments never choose to intervene in the foreign exchange market.15 14See among others, Kouri (1976), Frankel (1982 a), and Dooley and Isard (1982 a). 15This point is made in Dooley and Isard (1982 b) in reference to Rodriguez (1980). ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 245 It is concluded from this brief overview of existing models that an appraisal of intervention policy requires a model that deals with both political risk and exchange risk as determinants of pri- vate portfolio behavior. One way to simplify such a model is to rule out expected paths for the level of real exchange rates that generate levels of net international indebtedness that are expected to increase without limit. Expected paths for current accounts that imply unlimited growth in a country's net international indebtedness can be ruled out if, at some future date, the associated rise in debt service costs owing to an increasing political risk premium will make default optimal for the debtor government. Since the present value of any nonresident holdings of debt on the day of default is zero, such a path for exchange rates cannot be optimal. If it is assumed that only one exchange rate level is consistent with a sustainable cur- rent account position in a steady state, a long-run equilibrium level of the exchange rate s in some future time period T can be determined. The path that exchange rates are expected to follow toward ST is a component of the expected yields on all the financial assets in the model. Foreign exchange market intervention policy plays a role in determining the steady-state exchange rate, since the debt service burden the government is expected to incur de- pends, in part, upon the currency denomination of its debt. A country that never issues or holds foreign-currency-denominated debt (never intervenes in the foreign exchange market) might be expected to pay an exchange risk premium on its securities that would depend upon the parameters in condition (12). If this is the case, the sustainable net indebtedness of a country over time will depend in part on its exchange market intervention policy, which is one of the many factors that will determine the level of ST. Thus, if exchange risk premiums are not zero, intervention policy does have "real" effects and can influence the equilibrium path for exchange rates. II. Empirical Tests of Model Two approaches are used to evaluate empirically the effec- tiveness of exchange market intervention policy. The more direct approach is to solve condition (12) for the exchange rate and to attempt to estimate parameters that measure the effect on ex- change rates of changes in the supplies of bonds denominated in different currencies. ©International Monetary Fund. Not for Redistribution 246 MICHAEL DOOLEY Comprehensive reviews of such efforts by Genberg (1981) and Meese and Rogoff (1981) indicate that in practice this approach has not provided convincing evidence for a stable relationship between intervention policies and exchange rates. As pointed out in Mussa (1979) and Dooley and Isard (1981), changes in ex- change rates seem to be dominated by revisions in expectations concerning future values of money supplies, bond supplies, cur- rent account balances, and other important variables rather than the outcomes for such variables during the period in question. Perhaps because of the difficulty in specifying expectations for these variables, existing models have succeeded in explaining only a small share of the observed variability in exchange rates since 1973. An alternative approach to evaluating the possible effectiveness of exchange market intervention is to note that a necessary, but not a sufficient, condition for intervention to be effective is that bonds denominated in different currencies be imperfect substi- tutes. A contribution of the model developed in this paper is to provide a basis for identifying which of the many possible interest rate differentials available can be exploited to test the imperfect substitutes hypothesis. In order to test this hypothesis, it is necessary to identify secu- rities that are pure counterparts to the theoretical bonds in the model developed previously. In particular, we must be able to measure supplies and rates of return on securities that carry equiv- alent political risks but are denominated in different currencies. Although industrial countries do, from time to time, issue foreign currency securities (for example, the Carter bonds issued by the United States), there are often special marketing or other re- strictions on such issues that make comparison with domestic currency securities difficult. In the case of developing countries, comparison is difficult because their domestic currency securities may not be widely traded and may be subject to administered interest rates or other market imperfections. These problems have motivated several efforts to disentangle information available in Eurocurrency market interest rates. One can view the Eurocurrency market as the combined bal- ance sheets of Eurobanks. In order to avoid needless complexity, it is assumed that Eurobanks are relatively averse to exchange risk and always match assets and liabilities by currency denomination. Each of the assets of Eurobanks are equivalent to one of the four bonds in the financial sector described earlier. Since Eurobanks ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 247 hold a wide variety of financial assets, we are assuming that claims on the private sector of a given country are perfect substitutes for the outside bonds of that country's government denominated in the same currency. Since a Eurobank is by definition not a resi- dent of either country, it faces political risk on all of its assets. For example, in offering a Euromark deposit, the Eurobank must consider its investment opportunities, which consist of deutsche mark-denominated bonds issued by U.S. or German residents. The expected yields on these two bonds would differ because of the different political risk associated with each. The Eurobank deposit, in contrast, can be viewed as carrying no polit- ical risk for the depositor, since it can be expected that the bank's capital will act as a guarantee in the event of a decrease in the value of the Eurobank's assets. It follows that the difference be- tween the Euromark deposit interest rate and the interest rate on U.S. and German government deutsche mark-denominated bonds is a measure of the market's valuation of political risks associated with claims on German and U.S. residents. Following the assumption made in this paper that only the net debtor country carries positive political risk, the Eurocurrency rate will be equal to the interest rate (plus a normal deposit-loan spread) at which the net creditor country can issue bonds denom- inated in various currencies. For empirical work, this paper will assume that the net creditor or zero political risk country is the United States. Thus, the Eurodollar loan rate, EDOL, is assumed to be identical to the yield, RUS$, that the U.S. Government would pay on a similar security. More important for the purposes of this paper is the implication that the Euromark loan rate, EDM, is identical to the normally unobservable rate, RUSDM, at which the U.S. Treasury could sell deutsche mark-denominated securities. Moreover, since the difference between the Euromark deposit rate and the German Government bond rate, RGDM, must be the same as the difference between the Eurodollar de- posit rate and the interest rate on dollar-denominated German Government bonds, a value can also be derived for the normally unobservable rate, /?G$, at which the German Government can sell dollar-denominated bonds. To summarize, we can obtain the following information from Eurocurrency interest rates: ©International Monetary Fund. Not for Redistribution 248 MICHAEL DOOLEY Perhaps the most interesting hypothesis suggested by these re- lationships is that the market forward exchange rate, which is known to equal the Eurocurrency interest rate differential, re- flects the differential yield that both governments face in market- ing debt denominated in the two currencies. The observed for- ward premium is independent of political risk and depends only on the expected value of the change in the exchange rate, E%X, and the risk premium, €, associated with the existing stocks of all governments' bonds denominated in different currencies. More- over, exchange market intervention, which does not alter political risk, will have no direct effect on the differences between onshore and offshore interest rates on assets denominated in the same currency. One can now substitute observable interest rates into equations (11) and (12), assume a linear relationship, and solve for the interest rate differential. Relationships similar to equations (17) and (18) have been test- ed in a number of papers using a wide variety of techniques. In general, the models tested have not carefully distinguished be- tween political and exchange risk, but the regression forms are similar to those developed here. The differential between domes- tic and offshore interest rates paid on bonds denominated in deutsche mark was tested in Dooley and Isard (1980), with the additional specification that capital controls might also affect the interest differential. In that study, it was concluded that while capital controls in place were the most important determinant of the very large differentials that marked the 1971-74 time period, political risk also seemed to explain a significant part of these interest rate differentials. This finding has an important bearing on the model developed here, because it suggests that a country's prospects for future increases in external indebtedness can have an important impact on the terms on which it can borrow. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 249 Although political risk has had measurable effects on interest rates, the second part of the story—the importance of the cur- rency denomination of government debt in determining the inter- est rate differentials—has proven more difficult to support. A number of approaches to testing this relationship have been em- ployed. The most common is to impose the condition that b4 = 1, so that Under the null hypothesis that securities are perfect substitutes, all the coefficients on the right-hand side are zero and equa- tion (19) becomes the well-known open-interest-parity condition. If it is further assumed that the forecast of E%X conditional on today's information is formed rationally, then the ex post observed differences between the interest differential EDM - EDOL (often measured as the forward exchange premium) and the changes in the exchange rate are measures of forecast errors for the change in the exchange rate. Under the joint hypotheses of rational expectations and perfect substitutes, such forecast errors should be serially uncorrelated and have a zero mean. A number of studies have attempted to test this joint hypothe- sis. While the results of such studies are mixed, a number of careful studies, notably a recent paper by Hansen and Hodrick (1980), have concluded that the perfect substitutes-rational ex- pectations hypothesis is not consistent with the data. Thus, it appears that exchange market intervention might be an effective policy tool. There are, however, only three studies known to the author that have attempted to test a regression hypothesis similar to equation (18). Dooley and Isard (1981) tested a variant of equation (19) for quarterly data for 1973-78. That study was primarily directed toward determining the likely maximum size of risk premiums under some plausible assumptions concerning de- sired portfolio shares for residents of four regions: the United States, the Federal Republic of Germany, Organization of Petro- leum Exporting Countries (OPEC) members, and the rest of the world. In that paper, it was found that point estimates of risk premiums appear to be quite small. Using similar data, Frankel (1979, 1982 b) tested a more general form of equation (19) and concluded that there was no support for the imperfect substitutes hypothesis. In the next section, data is presented on the intervention activ- ©International Monetary Fund. Not for Redistribution 250 MICHAEL DOOLEY ities or a large number of countries in order to assess the impor- tance of a prominent feature of the theoretical model developed in this paper, which is that the relevant bond supplies in equa- tion (18) are not restricted to the dollar and deutsche mark bonds issued by the Federal Republic of Germany and the United States but also include all outside assets denominated in these two cur- rencies. These data suggest that the two-country models that lie behind existing empirical work lead to substantial mismeasure- ments of the regressors in equation (18). III. Exchange Market Intervention of Industrial and Developing Countries: 1975-80 In this section, the paper presents estimates for exchange mar- ket intervention for both industrial and developing countries. The data indicate that the intervention policies of industrial countries since 1973 have generated changes in the supplies of bonds de- nominated in various currencies that are quite small relative to the growth of total debt. For many industrial countries, foreign cur- rency debt positions were large relative to the total stock of debt outstanding in March 1973, but these positions remained nearly unchanged through the end of 1980, while the stock of total net debt tripled. The apparent unwillingness of industrial countries to denomi- nate a share of their debt in foreign currencies may have led private market participants to regard intervention transactions of industrial countries as representing only transitory changes in the relative supplies of securities denominated in different currencies. In contrast, estimates for intervention policies of developing countries indicate that this group of countries increased the share of its total net debt denominated in the currencies of industrial countries between 1974 and 1978. Recalling that political risk depends upon the net claims on a given country but that exchange risk is a function of the net positions that all governments take in a given currency, it follows from the model developed in this paper that the intervention policies of developing countries may have been important in determining an exchange risk premium between currencies such as the U.S. dollar and the deutsche mark. In evaluating the importance of developing countries' inter- vention policies, it is probably necessary to take into account the fact that these policies depend, in part, upon conditions in ex- ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 251 change markets and international credit markets. The possible endogenous nature of developing country intervention policies does not alter the fact that private wealth holders must be willing to hold the total supply of outside debt denominated in a given currency.16 Given the rapid changes in the financial positions of both oil producing and other developing countries in recent years, the collective intervention decisions of these governments has played an important role in determining the currency denomi- nation of financial assets held by the private sector. Official transactions included in the estimates of intervention presented in this section follow from the model developed in Section I. In particular, the definition of intervention is neither limited to transactions initiated with the intention of affecting exchange rates or exchange market conditions nor is it limited to transactions initiated by the part of the government that is nor- mally concerned with exchange markets. As was discussed in Sec- tion I, any transaction that is equivalent to an exchange with the private sector of nonmonetary debt denominated in different cur- rencies is identified as intervention. It is important to recall that the theoretical model developed in Section I was based on the assumption that only net positions in various currencies are rele- vant. If a country were to issue a dollar-denominated bond, for example by borrowing dollars in the Eurodollar market, and in- vest the proceeds in a dollar bond, for example in a U.S. Treasury security, there would be no change in the private sector's net holdings of dollar-denominated nonmonetary debt and therefore no net intervention. It follows that the management of the size and currency composition of a country's official reserve assets is a component of its intervention policy that cannot be evaluated without taking into account that country's management of the currency denomination of its nonmonetary debt. Another important feature of the estimates of intervention re- ported in this paper is that to the extent possible, all transactions that alter the net currency position of the government are includ- ed. In addition to the changes in the currency denomination of official assets and liabilities, changes in the private sector's posi- tion that are mandated or subsidized by the government should be included. For example, if a private or quasi-private firm is induced 16Simply put, an outside asset is an asset that the private sector does not incorporate into its own balance sheet. Changes in the relative supplies of out- side assets can be assumed to be exogenous or endogenous in a model of exchange rate determination. See Henderson (1982). ©International Monetary Fund. Not for Redistribution 252 MICHAEL DOOLEY by the government to alter its net holdings of foreign currency debt, this should be included in that country's measured inter- vention activity.17 Finally, all official forward exchange trans- actions should be included in an estimate of intervention. Although this definition of intervention policy is in many ways a more comprehensive one than is usually considered, there is an important sense in which the definition of intervention is limited in this discussion. The most important limitation is that other policy tools that might have a profound impact on exchange rates are not considered a part of intervention policy. In particular, the management of the government's monetary liabilities might be directed partly toward an exchange rate objective and might be more important than intervention policy in explaining movements in exchange rates. INDUSTRIAL COUNTRIES Our estimates of exchange market intervention of industrial countries are summarized in Charts 1-12 in the Appendix. The solid line in each chart shows the value (in domestic currency units) of the central government's net nonmonetary debt. The broken line represents an estimate of the stock of industrial coun- try governments' debt that is denominated in domestic currency and held by the public. If there had never been any intervention in foreign exchange markets by industrial countries, these two aggregates would always equal one another and would measure the cumulative budget deficit of the government less sales of debt to the monetary authority. Exchange market intervention policy of all industrial countries in this country's currency is measured by the divergence between these two debt aggregates. For example, in the first quarter of 1973, the German Government's net non- monetary debt totaled about DM 45 billion. But the value of deutsche mark-denominated nonmonetary debt of industrial country governments held by the public was more than two and a half times this amount, or about DM 116 billion. Thus, industrial countries' cumulative exchange market intervention policies un- der the fixed exchange rate system had generated a supply of deutsche mark-denominated bonds in the hands of the public that was more than twice what would have been required to finance the 17As described in the Appendix, it is assumed that for developing countries, all foreign currency debt reported by the World Bank Debtor Reporting System is ultimately the responsibility of the government. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 253 Federal Republic of Germany's budget deficits. For Japan, the supply of yen-denominated debt in the hands of the public in early 1973 was a bit less than twice what would have been necessary to finance Japan's budget deficits; while for France, the value of French franc-denominated debt was about one and a quarter times the value of total French net debt outstanding. As shown in Table 1, similar ratios for other industrial countries, with the exception of the United States, stood between unity for the Unit- ed Kingdom and 1.2 for Sweden. The United States was in the opposite position from the rest of the industrial countries at the close of the fixed rate system. The United States' net non- monetary debt totaled about $266 billion in early 1973, while U.S. dollar-denominated debt in the hands of the public was only about 70 per cent of this amount. It seems clear from this data that the exchange market inter- vention policies of industrial countries played a major role in determining the currency denomination of assets in the hands of the public before 1973. As shown in Charts 1-12 in the Appendix, TABLE 1. TWELVE INDUSTRIAL COUNTRIES: RATIO OF NET NONMONETARY DEBT OF CENTRAL GOVERNMENTS, DENOMINATED IN DOMESTIC CURRENCY, TO TOTAL NET NONMONETARY DEBT, FIRST QUARTER 1973 AND FIRST QUARTER 1981 First Quarter First Quarter Country 1973 1981 Australia 1.191 0.88 Belgium 1.06 0.85 Canada 1.17 0.95 Finland 1.04 0.74 France 1.24 0.82 Germany, Fed. Rep. of 2.60 1.30 Italy 1.012 0.99 Japan 1.74 1.063 Netherlands 1.19 1.08 Sweden 1.20 1.074 United Kingdom 1.02 1.00 United States 0.69 0.80 Second quarter 1973. 2First quarter 1975. 3First quarter 1980. ^hird quarter 1980. ©International Monetary Fund. Not for Redistribution 254 MICHAEL DOOLEY however, the currency denomination of nonmonetary debt issued by governments of these industrial countries has been determined since 1973 almost exclusively by the size of the fiscal deficits of various countries. This is most clearly the case for the United States, the Federal Republic of Germany, and Japan—countries that have received the bulk of the attention in studies of exchange market intervention policy. As shown in Table 1, the ratio of total net debt to domestic-currency-denominated debt of these coun- tries moved rapidly toward unity from 1973 to 1981. Exceptions to this tendency included the United Kingdom and Italy, whose policies appear to have remained essentially unchanged. Finally, there was a clear tendency for the ratio of domestic currency to total net debt to decrease to less than unity for France and several of the smaller industrial countries including Belgium, Canada, Australia and Finland. As is shown in the charts, this tendency most often became apparent after 1977. DEVELOPING COUNTRIES Data for the exchange market intervention activities of 95 de- veloping countries for 1974-78 are shown in Chart 13. The chart is similar to those presented for the industrial countries. The solid line shows an estimate of the dollar value of total net non- monetary debt of the central governments of these countries, while the broken line shows the dollar value of domestic-currency- denominated nonmonetary debt of these countries. The differ- ence is, by definition, the net value of these governments' foreign currency liabilities—that is, their foreign exchange reserve assets less their foreign-currency-denominated nonmonetary debt. The application of this paper's definition of exchange market intervention to developing countries generates difficulties in both interpretation and measurement. A comprehensive analysis of the financial policies of developing countries would take into account the fact that, for many of them, such policies are severely limited by poorly developed markets for domestic currency debt. More- over, the prevalence in developing countries of exchange controls that limit private exchanges of financial assets tends to isolate the market for domestic currency debt from international markets and thus undoubtedly alters the effects of intervention on ex- change rates and other variables. An analysis of the role played in developing countries by the debt management policy defined in ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 255 this paper as intervention is a subject for further research. This paper has a narrower focus, in that it attempts to evaluate the net effect these policy decisions have had on the supplies of debt denominated in major currencies. Difficult measurement problems include the treatment of for- eign currency positions of parastatal industries. In addition, a substantial share—about half in 1977—of the foreign currency debt of developing countries is held by governments of developed countries and by multilateral organizations. We assume that these governments and multilateral institutions pass this debt through, in the same currency, to the private sector. A consistent account- ing for both developed and developing countries' intervention would require inclusion of official claims of developed countries on developing countries in the measure of developed countries' official assets. To the extent that such credits to developing coun- tries have a substantial grant component, a full accounting of the pass-through would include implicit claims on future tax revenues of developed countries. If such a procedure were followed, it would not materially alter this paper's measure of developed country intervention policy. In a group of countries this large, there are, of course, a wide range of financial policies. If, for example, the value of foreign currency reserve assets of oil exporting countries had been always exactly equal to the net foreign currency liabilities of non-oil developing countries, there would be no intervention for the de- veloping countries, and the two lines in Chart 13 would coincide. In fact, between 1974 and 1978, the $40 billion increase in foreign currency assets held by oil exporting and non-oil developing coun- tries included in the sample was more than matched by the $108 billion increase in their foreign-currency-denominated liabilities. The important difference in the data for these countries as compared with the industrial countries considered previously is the continued importance of exchange market intervention policy after 1974. At the end of 1974, data for these countries are similar to that for the industrial countries, in that a substantial share (about 26 per cent) of their total nonmonetary debt was denomi- nated in foreign currencies. However, since 1974, while the indus- trial countries have not denominated a significant share of their increasing debt in foreign currencies, the developing countries included in this sample have denominated an increasing share of their net debt in foreign currencies. By 1978, the last year for ©International Monetary Fund. Not for Redistribution 256 MICHAEL DOOLEY which there was reasonably complete data, the share of devel- oping countries' foreign currency debt had increased to about 32 per cent of total debt. Partial data for 1979 and 1980 suggests that this trend probably continued. In this environment, a change in the intervention policy of developing countries would not be interpreted as a transitory change in the relative supplies of bonds denominated in different currencies. Instead, such a change in policy could reasonably be interpreted as changing the expected relative supplies of, for ex- ample, dollar-denominated and deutsche mark-denominated bonds over an extended time period. This may be the reason that so-called reserve diversification has received considerable atten- tion in recent years. The model developed in this paper, though, would suggest that only the net reserve position is important. Table 2 shows a breakdown by currency denomination of the net debt position of 95 developing countries. As is shown in the table, the increase in the share of net foreign-currency- denominated debt for these countries was more than accounted for by an increase in the share of net dollar-denominated debt from -1 per cent to 16 per cent.18 The intervention activities of these developing countries added about $50 billion in dollar- denominated assets to private portfolios. In contrast, the share of developing country net debt denominated in deutsche mark was never large and, in fact, fell during the period. Even taking into account the difficulties in accurately measuring and interpreting the intervention policies of developing countries that were dis- cussed earlier, it would appear that the intervention policies of developing countries and smaller industrial countries may have been more important in altering the relative supplies of dollar- denominated and deutsche mark-denominated securities than the intervention policies of the United States, the Federal Republic of Germany, and other major industrial countries. A very tentative conclusion is that, on balance, the intervention policies of devel- oping countries may have contributed to pressure on dollar ex- change rates. Unfortunately, data are available on an annual basis for only a few years and therefore are not useful for formal hy- pothesis testing. If the ideas advanced here prove to be of suf- ficient interest, it might be worthwhile to undertake the for- 18The negative share for 1974 means that the group of countries had a net asset position in dollars. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 257 TABLE 2. NINETY-FIVE DEVELOPING COUNTRIES: NET NONMONETARY DEBT BY CURRENCY DENOMINATION, 1974-78 Share Denominated in: U.S. Deutsche Pounds French Domestic Year Total dollars mark sterling francs currency Other billion U.S. dollars _— _ rtff 1974 20.6 -1 1 0 2 84 14 1975 34.3 4 2 3 2 77 13 1976 38.0 4 0 3 2 79 12 1977 49.5 8 -1 3 2 77 11 1978 89.9 16 0 2 2 68 11 midable task of gathering and refining quarterly data. A natural extension of this research is a reappraisal of the existing literature on the importance of countries' preferences for reserve assets denominated in different currencies. The model developed in this paper suggests that changes in holdings of re- serve assets must be considered together with changes in official liabilities. Given the rapid increases in foreign currency liabilities outstanding, changes in the shares of liabilities denominated in various currencies are likely to dominate observed changes in the net position of that country in a given currency. For example, the fall in the share of reserve assets denominated in dollars during the period is overshadowed by the rise in the net share of dollar- denominated liabilities issued by developing countries. Studies that attempt to define an optimal policy for the management of the currency composition of reserve assets address only a part, and not the most important part, of a country's exchange market intervention policy. IV. Objectives for Exchange Market Intervention Policy In this final section, policy objectives are suggested that are consistent with the observed patterns of recent exchange market intervention policies of developing and industrial countries. The primary conclusion offered is that exchange rates among major ©International Monetary Fund. Not for Redistribution 258 MICHAEL DOOLEY industrial countries are more likely to be systematically influenced by the intervention policies of developing countries than by the intervention policies of the industrial countries themselves. Although there are undoubtedly many different objectives for exchange market intervention policies among developing coun- tries, the dominant objective seems to be to minimize the ex- pected cost of servicing their central government's debt. One important implication of this imputed objective is that developing countries will continue to denominate a substantial share of their debt in foreign currencies. If assets denominated in different cur- rencies are not perfect substitutes, a developing country faces the problem of choosing an optimal mix of net positions in domestic and foreign currencies. In most cases, the exchange risk premium necessary to induce nonresidents to hold the government's domes- tic currency securities is likely to be greater than that on similar securities denominated in the currencies of industrial countries. For this reason, one should expect that a substantial share of the flow of developing country debt will continue to be denominated in the currencies of industrial countries. The collective decisions of developing countries as to the denomination of their net debt is likely to continue to be an important determinant of the supply of government securities denominated in these currencies. The industrial countries, though, can be thought of as at- tempting to influence exchange rates over limited time horizons, where the size and duration of intervention initiatives are con- strained by the fundamental decision not to accumulate foreign currency debt over time. It seems likely that the effect of intervention policies under these conditions would be quite weak unless private expectations are influenced by the information conveyed by the government's intervention policy. As was argued previously, the current ex- change rate depends upon market participants' expectations about future money supplies, bond supplies, current account im- balances, and a number of other variables. Given the behavior of industrial countries since 1973, an intervention initiative is not likely to lead to a revision of expectations concerning the currency composition of the flow of official debt over time. It is likely, however, that the exchange rate expectations of the government and the private sector will differ at times. This could be due to a different set of expectations for some important variable, such as the rate of relative growth of money supplies, or a different under- ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 259 standing of the parameters of the model that relate such variables to the exchange rate. The market exchange rate depends only upon private expecta- tions unless the government changes the relative supplies of secu- rities or money in response to a difference in opinion concerning the equilibrium exchange rate. Suppose the government and pri- vate expectations for the growth of the domestic money stock are not the same. If the government adheres to its long-run inter- vention policy, the market exchange rate will follow a path that is incorrect according to the government view. The government could announce that the market is wrong, but this might have little impact. Or the government could engage in "supplementary inter- vention" in the exchange market and continue to do so to move the exchange rate toward its "correct" anticipated trajectory. This might be called zero accumulation intervention, since, when either the private sector or the government realizes its mistake, the intervention must be reversed to keep the exchange rate on the path consistent with the desired long-run debt management policy. Supplementary intervention can affect exchange rates by temporarily changing the relative supplies of bonds denominated in different currencies. Perhaps more important is the possibility that such intervention will be a signal to private market par- ticipants of what the government's outlook is for the exchange rate and perhaps for monetary policy. Almost by definition, such intervention will not generate stable changes in interest rates or exchange rates, since such changes depend on a learning process on the part of both the government and private sector. APPENDICES I. Data Sources Industrial countries Data are from various issues of the Fund's monthly publication International Financial Statistics (IPS) and national sources. Net nonmonetary debt is total central government debt minus holdings of the monetary authority. Domestic- currency-denominated nonmonetary debt is this total plus foreign exchange reserves adjusted for European Currency Unit (ECU) gold valuation changes, minus foreign-currency-denominated liabilities. Estimates of foreign-currency- ©International Monetary Fund. Not for Redistribution 260 MICHAEL DOOLEY denominated debt are drawn from IPS and national sources. Estimates for publicly guaranteed foreign-currency-denominated debt are included for Aus- tralia, Canada, France, Italy, and the United Kingdom. Forward exchange po- sitions are included for Canada. Developing countries Data on foreign-currency-denominated debt are from the World Bank Debtor Reporting System and include public debt, publicly guaranteed debt, and a small amount of private external debt, all of which have original maturities of more than one year. Data on foreign currency reserve assets are from national sources. Data on domestic currency debt are estimated from data available in IPS for 37 countries. These 37 countries, which account for 30 per cent of total external debt, are assumed to issue domestic-currency-denominated debt and foreign- currency-denominated debt in the same ratio as the full sample of 95 countries. II. Exchange Market Intervention of Selected Industrial and Developing Countries CHART 1. UNITED STATES: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FiRST QUARTER 1981 ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 261 CHART 2. CANADA: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 CHART 3. AUSTRALIA: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 ©International Monetary Fund. Not for Redistribution 262 MICHAEL DOOLEY CHART 4. JAPAN: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1980 CHART 5. BELGIUM: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 263 CHART 6. FINLAND: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 CHART 7. FRANCE: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 ©International Monetary Fund. Not for Redistribution 264 MICHAEL DOOLEY CHART 8. FEDERAL REPUBLIC OF GERMANY: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 CHART 9. ITALY: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1975-FiRST QUARTER 1981 ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 265 CHART 10. NETHERLANDS: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 CHART 11. SWEDEN: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 ©International Monetary Fund. Not for Redistribution 266 MICHAEL DOOLEY CHART 12. UNITED KINGDOM: ESTIMATED EXCHANGE MARKET INTERVENTION, FIRST QUARTER 1973-FmsT QUARTER 1981 CHART 13. NINETY-FIVE DEVELOPING COUNTRIES: ESTIMATED EXCHANGE MARKET INTERVENTION, 1974-78 ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 267 BIBLIOGRAPHY Aliber, Robert Z., "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, Vol. 81 (November-December 1973), pp. 1451-59. 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Dornbusch, Rudiger, "Expectations and Exchange Rate Dynamics," Journal of Political Economy, Vol. 84 (December 1976), pp. 1161-76. , "Exchange Rate Risk and the Macroeconomics of Exchange Rate De- termination" (unpublished, National Bureau of Economic Research, June 1980). Fischer, Stanley, "Stability and Exchange Rate System in a Monetarist Model of the Balance of Payments," in The Political Economy of Monetary Reform, ed. by Robert Z. Aliber (Montclair, New Jersey, 1977), pp. 59-73. Frankel, Jeffrey, "A Test of the Existence of the Risk Premium in the Foreign Exchange Market vs. the Hypothesis of Perfect Substitutability," Inter- national Finance Discussion Papers, No. 149 (Board of Governors of the Federal Reserve System, August 1979). ©International Monetary Fund. Not for Redistribution 268 MICHAEL DOOLEY (1982 a), "Monetary and Portfolio-Balance Models of Exchange Rate Determination," in Economic Interdependence and Flexible Exchange Rates, ed. by J. Bhandari (MIT Press, forthcoming in 1982). (1982 b), "A Test of Perfect Substitutability in the Foreign Exchange Market," Southern Economic Journal (forthcoming in 1982). Frenkel, Jacob A., "A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Vol. 78 (No. 2, 1976), pp. 200-224. , and Richard M. Levich, "Covered Interest Arbitrage: Unexploited Profits?" Journal of Political Economy, Vol. 83 (April 1975), pp. 325-38. Frenkel, Jacob A., and Joshua Aizenman, "Aspects of Optimal Management of Exchange Rates" (unpublished, National Bureau of Economic Research, September 1981). Genberg, Hans, "Effects of Central Bank Intervention in the Foreign Exchange Market," Staff Papers, Vol. 28 (September 1981), pp. 451-76. Girton, Lance, and Dale W. Henderson, "A Two Country Model of Financial Capital Movements as Stock Adjustments with Emphasis on the Effects of Central Bank Policy," International Finance Discussion Papers, No. 24 (Board of Governors of the Federal Reserve System, 1973). Hansen, Lars P., and Robert J. Hodrick, "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, Vol. 88 (October 1980), pp. 829-53. Henderson, Dale W., "Exchange Market Intervention Operations: Their Ef- fects and Their Role in Financial Policy" (unpublished, Board of Governors of the Federal Reserve System, January 1982). This paper will appear in Exchange Rates: Theory and Practice, ed. by John F. O. Bilson and Richard C. Marston (University of Chicago Press, forthcoming in 1983). , and Kenneth Rogoff, "Negative Net Foreign Asset Positions and Sta- bility in a World Portfolio Balance Model," Journal of International Eco- nomics (forthcoming in 1982). Hodrick, Robert J., "An Empirical Analysis of the Monetary Approach to the Determination of the Exchange Rate," in The Economics of Exchange Rates: Selected Studies, ed. by Jacob A. Frenkel and Harry G. Johnson (Reading, Massachusetts, 1978), pp. 97-116. Isard, Peter, "An Accounting Framework and Some Issues for Modelling How Exchange Rates Respond to the News," International Finance Discussion Papers, No. 200 (Board of Governors of the Federal Reserve System, Jan- uary 1982). Kouri, Pentti J. K., "The Determinants of the Forward Premium," Institute for International Economic Studies, Seminar Paper No. 62 (Stockholm, August 1976). McKinnon, Ronald I., "Portfolio Balance and International Payments Adjust- ment," in Monetary Problems of the International Economy, ed. by Robert A. Mundell and Alexander K. Swoboda (University of Chicago Press, 1969), pp. 199-234. ©International Monetary Fund. Not for Redistribution ANALYSIS OF EXCHANGE MARKET INTERVENTION 269 Meese, Richard A., and Kenneth Rogoff, "Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?" (unpublished, Board of Gov- ernors of the Federal Reserve System, June 1981). Mussa, Michael, "Empirical Regularities in the Behavior of Exchange Rates and Theories of the Foreign Exchange Market," in Policies for Employment, Prices, and Exchange Rates, ed. by Karl Brunner and Allan H. Meltzer, Vol. 11, Carnegie-Rochester Conference Series on Public Policy (Am- sterdam, 1979), pp. 9-57. , The Role of Official Intervention, Occasional Paper No. 6, Group of Thirty (New York, 1981). Rodriguez, Carlos A., "The Role of Trade Flows in Exchange Rate Determina- tion: A Rational Expectations Approach," Journal of Political Economy, Vol. 88 (December 1980), pp. 1148-58. Roper, Don E., and Stephen J. Turnovsky, "Optimal Exchange Market Inter- vention in a Simple Stochastic Macro Model," Canadian Journal of Eco- nomics, Vol. 13 (May 1980), pp. 296-309. ©International Monetary Fund. Not for Redistribution Interest Rate Differentials and Exchange Risk: Recent Argentine Experience MARIO I. BLEJER* N RECENT YEARS, an extensive literature has emerged on the i relationship between interest rates on financial assets denomi- nated in different currencies. One approach to this topic is em- bodied in the covered interest parity theorem, which applies when there are organized spot and forward exchange markets that oper- ate without administrative restrictions. The theorem implies that short-term capital movements will result in the equalization, when expressed in terms of the same currency and after covering the operation in the forward exchange market, of the returns on assets that are identical in all respects except for the currency of denom- ination. The empirical validity of the proposition that covered interest parity holds in such markets has been studied extensively, and the nature of the departures from interest parity have been modeled in detail. Frenkel and Levich (1975, 1977) have shown that observed deviations from parity in Euromarkets are con- sistent with the level of existing transactions costs. Others have claimed that, in fact, observed departures from interest parity arise because assets issued in different countries are unlike in more ways than currency of denomination. Political and sovereign risks, capital and exchange controls, taxation, and other practices differ across countries, and they tend to introduce a wedge be- tween covered nominal returns.1 Differences in exchange risk *Mr. Blejer, economist in the Financial Studies Division of the Research Department, is a graduate of the Hebrew University of Jerusalem and of the University of Chicago. He has been on the faculty of the Hebrew University and of Boston University. 'See Aliber (1973, 1975), Dooley and Isard (1980), and Levi (1977). A useful survey of the issues related to the absence of perfect substitutability of assets across countries and a careful analysis of its implications is presented in Buiter 270 ©International Monetary Fund. Not for Redistribution INTEREST RATE DIFFERENTIALS AND EXCHANGE RISK 271 obviously do not matter in this context, since covered interest parity deals with observed forward exchange rates and therefore there is no exchange rate uncertainty.2 An alternative approach to analyzing the relationship between nominal interest rates between countries is provided by the Fisher hypothesis. Applied to the open economy, this hypothesis main- tains that, for instruments that are identical except for their cur- rency denomination, interest rate differentials should be ex- plained by the expected exchange rate change between the two currencies. The Fisher proposition and the interest parity theorem coincide only when there is no risk premium in the forward mar- ket, that is, when the forward rate and the expected future ex- change rate are one and the same.3 Clearly, departures from Fisher parity respond to the same set of variables as departures from covered arbitrage (such as transactions costs, political risk, and differential taxation4). In addition, if expectations about the future course of the exchange rate are not held with perfect cer- tainty, exchange risk will also be part of the observed differential.5 Only the Fisher "open" hypothesis is a testable proposition for currencies for which there are no organized forward exchange markets. One test (Cumby and Obstfeld (1981)) showed that, in the case of six industrial countries, the relationship does not hold, (1980). For additional complications arising in developing countries, see Tanzi and Blejer (1982). While most of the studies on covered interest arbitrage involve the major industrial countries, there have been studies for Singapore and Mexico; see Blejer and Khan (1980) and Lizondo (1981), respectively. 2In fact, in the presence of the factors discussed above, similar inequalities in nominal interest rates will arise in a world of fixed exchange rates that are expected to remain constant or, in the absence of forward coverage, when exchange risk is fully diversified (see Frankel (1979)). 3On the issue of risk premium in the forward exchange market, see Grauer, Litzenberger, and Stehle (1976) and Hansen and Hodrick (1980). Frenkel and Razin (1980) have shown that the neglect of risk premium considerations in efficiency tests of the foreign exchange markets is of little empirical significance. 4In most countries, accrued capital (including exchange) gains, or even real- ized ones, are not taxed, or the taxes are very easily evaded. On the other hand, nominal incomes arising from interest payments are generally taxable if gener- ated domestically but are often de facto exempt when generated outside the country. The differential taxation issue arises from the conflicting rules applied by different countries: the rule of source (claims to tax all income generated from sources located in the country) and the rule of residence (claims to tax all income of residents of the country regardless of the location of the source of income). On issues concerning international taxation practices, see Muten (1982). 5In other words, in the presence of exchange risk, assets that are identical except for their currency denomination will not be considered perfect substitutes. ©International Monetary Fund. Not for Redistribution 272 MARIO I. BLEJER that is, assets denominated in different currencies cannot be taken as perfect substitutes. The purpose of this study is to test the Fisher "open" hypothesis for the case of Argentina, a country that has undergone a large measure of financial market liberalization since 1976, with consid- erable movements of capital having taken place in the past four years, but a country in which an organized forward market has not yet developed.6 I. The Argentine Experience The various stabilization plans implemented in Argentina since 1976 have involved increased reliance on market forces in several areas of economic activity. The financial reform completed by mid-1977 entailed the full liberalization of interest rates and the elimination of the highly centralized banking arrangements, which were preventing the growth of domestic financial inter- mediation.7 Exchange controls were eliminated, barriers to free capital movements were largely reduced,8 and exchange rate pol- icies changed over the period. Until May 1978, a crawling-peg system was followed, and the exchange rate for the peso was 6 A forward exchange market was in operation in Argentina during a limited period in the mid-1960s, but its activities were discontinued until July 6, 1978, when the central bank again authorized its operations. It never, however, devel- oped to any significant size, owing to the restrictions imposed on its operations (forward transactions were limited to the hedging of dollar-denominated imports by privately owned companies). In 1979, the scope was widened to include a few financial operations, such as permitting firms to hedge balance-sheet exposure and loans. Although about US$100 million was transacted in that market in 1978, virtually no operations took place in 1980. In December 1981, the central bank initiated a process directed toward the reactivation of the market, and some operations were registered that year. 7Before the Financial Entities Law was adopted in June 1977, a system of centralized deposits was in effect based on the imposition of 100 per cent reserve requirements. The new law enabled financial intermediaries to receive deposits on their own account. Reserve requirements were set at 45 per cent for all deposit liabilities. Financial intermediaries were allowed to allocate credit freely among economic sectors and to set interest rates in accordance with market conditions. "The restrictions to free capital mobility varied over the period. During a short period in 1978 there was a compulsory 15 per cent deposit requirement on foreign borrowing, and for most of the period some minimum terms for foreign borrowing were in effect. However, the limitations were easily avoidable, and they did not effectively prevent the integration of domestic and foreign capital markets. ©International Monetary Fund. Not for Redistribution INTEREST RATE DIFFERENTIALS AND EXCHANGE RISK 273 adjusted by the central bank at relatively short intervals in line with the differential between domestic and foreign inflation. After May 1978, the exchange rate was allowed to float, with a small degree of intervention. In December 1978, a new system was implemented. As part of a complete package of measures, the authorities preannounced the future path of the exchange rate by publishing a schedule of daily rates for the subsequent eight months. The schedule was extended for additional periods until its abandonment in June 1981. Except for some slight departures from the announcement in late 1980 and two large devaluations in February and March 1981, the authorities followed closely the previously announced policy.9 In June 1981, the foreign exchange market was split into a commercial market and a financial market. The commercial market was reserved for trade operations and the exchange rate was determined by the central bank, while in the financial market the exchange rate was, in principle, to be deter- mined by the free play of supply and demand. Given the swings in exchange rate policies and the uncertainties related to the changes in the characteristics of the various sta- bilization programs adopted, it would not be surprising if the Fisher "open" hypothesis failed to hold in Argentina. As in Cum- by and Obstfeld (1981), the test of this hypothesis is conducted as follows. Let it be the domestic nominal interest rate for the period starting at t and it* the equivalent foreign rate. If*, is the logarithm e of the rate of exchange at time t and xt is the logarithm of the rate expected to prevail at the end of the period, the Fisher hypothesis implies that If the realized exchange rate at t + 1 is expressed as the sum of its e expected value at t plus the prediction error (i.e., xt+1 = x t + 8,), equation (1) can be rewritten as where Dxt+1 is the actual rate of change in the spot rate over the maturity period, that is, Dxt+l = xt+1 -xt. A test of the Fisher hypothesis can be conducted by calculating equation (2) and ana- 9For an analysis of the characteristics and implications of the system of pre- announced exchange rates, see Blejer and Mathieson (1981). ©International Monetary Fund. Not for Redistribution 274 MARIO I. BLEJER lyzing the time-series properties of 8,. If the foreign exchange market is weakly efficient and expectations are therefore formed on the basis of all the available information, including past fore- cast errors, and if there are no significant anticipations of a radical change in exchange rate policies, then 8 should be white noise, that is, it should not display any pattern of serial correlation.11 If, however, the Fisher hypothesis does not hold in its simple form because domestic and foreign financial instruments are not per- fect substitutes, the difference between interest rate differentials and the realized change in the exchange rate will include, in addition to the forecast error 5, , a risk premium 0, , to account for exchange, sovereign, and political risk. Equation (2) then becomes l = kt (3) where kt = 8, + 0,. Moreover, additional elements reflecting transactions costs, regulations, and so forth would be included in kt. If these elements, as well as 0, , display a high degree of persis- tence, kt may be serially correlated despite the informational effi- ciency of the foreign exchange market. The value of kt for Argentina is calculated for two alternative time periods: (a) June 1977 to August 1981 12 and (b) December 1978 to January 1981, the period for which the preannounced exchange rate system was in effect.13 The domestic interest rate, it, is the 30-day deposit rate, and i* is the 30-day Eurodollar rate. The exchange rate used is the closing selling rate. All the interest and exchange rates are as of the last trading day of the month.14 An alternative series of kt is calculated by adjusting it for reserve requirements to allow for a more appropriate comparison of the cost of funds to financial intermediaries.15 10Weak efficiency is used here in the sense of Fama (1970) and implies that past information on the variable analyzed cannot be used to improve its forecast. uThe white noise test is therefore a joint test of informational efficiency and of the Fisher proposition. 12Following the implementation, in June 1977, of the new Financial Entities Law, which assured free market determination of domestic interest rates. 13Testing the hypothesis that the nature of exchange risk may have changed following the announcement of the exchange rate schedule. ^he data sources are as follows: for it, Central Bank of Argentina; for it, Data Resources Incorporated, Databank; and for Dxt+i, International Monetary Fund, Datafund. 15 The alternative series substitute /, for it in equation (3), where c it = (it — p/, )/(l - p) where p is the required reserve ratio on 30-day deposits and ©International Monetary Fund. Not for Redistribution INTEREST RATE DIFFERENTIALS AND EXCHANGE RISK 275 Using the Box-Jenkins method for analysis of univariate time series, the autocorrelation function is estimated for the two alter- native series of kt. The Ljung-Box adjusted version of the Box- Pierce test for the smallness of the whole set of the sample auto- correlation of lags 1 through n was computed.16 The adjusted Q -statistics reported below were computed with 12 lags for the complete sample, and therefore distributed as x2 with 12 degrees of freedom, and with 6 lags for the preannounced period. The obtained results are the following (significance level is in paren- theses)17 / i (adjusted) June 1977-August 1981 4.35 4.44 (0.95) (0.95) December 1978-January 1981 2.11 2.02 (0.90) (0.90) The autocorrelation functions are reported in Table 1. For both sample lengths, the means of k and their standard deviations are (in percentage terms) i i (adjusted) June 1977-August 1981 0.093 0.128 (9.666) (9.729) December 1978-January 1981 1.604 1.566 (1.800) (1.808) The results clearly indicate that the hypothesis that the ob- served interest rate differentials are white noise cannot be re- it is the compensation paid by the central bank on bank reserves. In comparing costs of funds (instead of alternative returns), the spread over the Eurorates applied to Argentine borrowers should also be included. Series on such spreads are, however, not available. Although the degree of access of domestic financial institutions to foreign capital markets has not been homogeneous, foreign funds have been continuously available. One factor easing the access to foreign fi- nancing is the composition of the commercial banking system with a predom- inance of official institutions (about 41 per cent of total deposits) and an in- creasing share of foreign-owned private banks (15 per cent). 16The distribution of the Box-Pierce Q-statistic can deviate from x2 in small samples. Ljung and Box (1978) propose a correction to account for the dis- crepancies. The adjusted statistic, Q, is equal to where n is the sample size and s the order of the autocorrelation coefficient rs. 17 2 2 The critical values of the x (i2) are 5.23 (0.95) and 6.30 (0.90); for x (6), the critical values are 1.64 (0.95) and 2.20 (0.90). ©International Monetary Fund. Not for Redistribution TABLE 1. AUTOCORRELATION FUNCTION OF INTEREST DIFFERENTIALS Lag: 1 2 3 4 5 6 7 8 9 10 11 12 June 1977-August 1981 . Coefficient -0.01 0.03 -0.07 -0.07 -0.03 -0.02 -0.03 -0.02 -0.02 -0.03 -0.02 -0.00 Standard error 0.14 0.14 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 ., Coefficient -0.01 0.25 -0.08 0.07 -0.03 -0.02 -0.03 -0.02 -0.02 -0.03 -0.02 -0.00 Standard error 0.14 0.14 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 December 1978-January 1981 . Coefficient 0.11 0.03 -0.03 -0.05 -0.08 -0.24 Standard error 0.20 0.20 0.20 0.20 0.20 0.20 ., Coefficient 0.10 0.02 -0.04 -0.05 -0.05 -0.24 Standard error 0.20 0.20 0.20 0.20 0.20 0.20 ©International Monetary Fund. Not for Redistribution INTEREST RATE DIFFERENTIALS AND EXCHANGE RISK 277 jected at the 5 per cent level for the complete period and at the 90 per cent level for the preannouncement period. These results are quite surprising, since they do not allow rejec- tion of the joint hypothesis of efficiency and perfect substituta- bility of assets.18 It is an intuitive tenet, however, that, in addition to institutional and organizational constraints specific to the Argentine financial structure, a substantial risk premium has been an important component of interest rate differentials following the opening of the capital market. Exchange risk was certainly not eliminated by the policy of exchange rate preannouncements, since the time horizons of the various schedules were not always well defined and the central bank refused to sell forward contracts based on the announced future rates. Given the increasing over- valuation of the Argentine currency, there was always a positive, nontrivial, probability that a large discrete devaluation would take place despite the preannounced schedule. This was the well- known "peso problem."19 Since it would not be realistic to rule out the existence of a risk premium and postulate perfect substitutability, a possible ratio- nalization for the result is that the Argentine market is indeed informationally efficient and that the risk premium appears to be time varying and serially uncorrelated. An implication is that interest rates have responded quickly to "news," that is, new information that appears randomly in the market.20 II. Summary Considering the Argentine financial market after its liberaliza- tion, it has been shown that observed nominal interest differen- tials, adjusted for exchange rate changes, do not display any pat- tern of serial correlation, and therefore behave as forecast errors 18The result is particularly surprising in view of the results obtained by Cumby and Obstfeld (1981) for industrial countries. 19On the "peso problem" and its empirical implications, see Krasker (1980) and Cumby and Obstfeld (1983). The "peso problem" tends to introduce a mean in the observed differential and may also introduce positive autocorrelation in the forecast errors when the discrete devaluation does not actually take place. This is not a necessary result if the perceived probability of devaluation fluctu- ates randomly, a conclusion that may be hinted at by the results obtained here. 20Some evidence on the rapid reaction of interest rates to current events (including unexpected changes in the exchange rate schedules) is provided by Fernandez (1981). ©International Monetary Fund. Not for Redistribution 278 MARIO I. BLEJER in an efficient market. A sensible interpretation of this result is that, although domestic and foreign assets are not likely to be perfect substitutes, the Argentine financial market is informa- tionally efficient and has been characterized by an uncorrelated, time-varying risk premium on domestic assets. REFERENCES Aliber, Robert Z., "The Interest Rate Parity Theory: A Reinterpretation," Journal of Political Economy, Vol. 81 (November/December 1973), pp. 1451-59. , "Monetary Independence Under Floating Exchange Rates," Journal of Finance, Vol. 30 (May 1975), pp. 365-76. Blejer, Mario I., and Mohsin S. Khan, "Foreign Exchange Market Regularities in a Developing Economy," Economics Letters, Vol. 6, No. 3 (1980), pp. 279-86. Blejer, Mario I., and Donald J. Mathieson, "The Preannouncement of Ex- change Rate Changes as a Stabilization Instrument," Staff Papers, Vol. 28 (December 1981), pp. 760-92. Buiter, Willem H., "Implications for the Adjustment Process of International Asset Risks: Exchange Controls, Intervention and Policy Risk, and Sov- ereign Risk," Working Paper No. 516, National Bureau of Economic Research (Cambridge, Mass., July 1980). Cumby, Robert E., and Maurice Obstfeld, "A Note on Exchange-Rate Ex- pectations and Nominal Interest Differentials: A Test of the Fisher Hypo- thesis," Journal of Finance, Vol. 36 (June 1981), pp. 697-703. , "International Interest-Rate and Price-Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," in Exchange Rates: Theory and Practice, ed. by John F. O. Bilson and Richard C. Marston (University of Chicago Press, forthcoming in 1983). Dooley, Michael P., and Peter Isard, "Capital Controls, Political Risk, and Deviations from Interest-Rate Parity," Journal of Political Economy, Vol. 88 (April 1980), pp. 370-84. Fama, Eugene F., "Efficient Capital Markets: A Review of Theory and Empir- ical Work," Journal of Finance, Vol. 35 (May 1970), pp. 383-417. Fernandez, Roque B., "Consideraciones ex-post sobre el Plan Economico de Martinez de Hoz," Centre de Estudios Macroeconomicos de Argentina (Buenos Aires, 1981). Frankel, Jeffrey A., "The Diversifiability of Exchange Risk," Journal of Inter- national Economics, Vol. 9 (August 1979), pp. 379-93. Frenkel, Jacob A., and Assaf Razin, "Stochastic Prices and Tests of Efficiency of Foreign Exchange Markets," Economics Letters, Vol. 6, No. 2 (1980), pp. 165-70. ©International Monetary Fund. Not for Redistribution INTEREST RATE DIFFERENTIALS AND EXCHANGE RISK 279 Frenkel, Jacob A., and Richard M. Levich, "Covered Interest Arbitrage: Un- exploited Profits?" Journal of Political Economy, Vol. 83 (April 1975), pp. 325-38. , "Transaction Costs and Interest Arbitrage: Tranquil versus Turbulent Periods," Journal of Political Economy, Vol. 85 (December 1977), pp. 1209-26. Grauer, Frederick L. A., Robert H. Litzenberger, and Richard E. Stehle, "Sharing Rules and Equilibrium in an International Capital Market Under Uncertainty," Journal of Financial Economics, Vol. 3 (June 1976), pp. 233-56. Hansen, Lars Peter, and Robert J. Hodrick, "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, Vol. 88 (October 1980), pp. 829-53. Krasker, William S., "The 'Peso Problem' in Testing Efficiency of Forward Exchange Markets," Journal of Monetary Economics, Vol. 6 (April 1980), pp. 269-76. Levi, Maurice D., "Taxation and 'Abnormal' International Capital Flows," Journal of Political Economy, Vol. 85 (June 1977), pp. 635-46. Lizondo, Jose S., "Interest Differential and Covered Arbitrage," Conference Paper No. 137, National Bureau of Economic Research (Cambridge, Mass., 1981). Ljung, G. M., and G. E. P. Box, "On a Measure of Lack of Fit in Time Series Models," Biometrika, Vol. 65 (August 1978), pp. 297-303. Muten, Leif, "Some Topical Issues Concerning International Double Taxation" (unpublished, International Monetary Fund, January 13, 1982). Tanzi, Vito, and Mario I. Blejer, "Inflation, Interest Rate Policy and Currency Substitution in Open Economics: A Discussion of Some Major Issues." It is scheduled to be published in World Development in 1982. ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution The International Monetary Fund, 1980-1981 A Selected Bibliography ANNE C. M. SALDA* IHE SELECTED REFERENCES presented in this bibliography Tcover books, pamphlets, reports, and periodical articles that describe the functions, organization, and activities of the Interna- tional Monetary Fund (IMF). Publications on the various aspects of international economics are included only when they contain material relating specifically to the Fund. Previous bibliographies in this series that were compiled by Martin L. Loftus were published in Staff Papers, Vol. 1, No. 3 (April 1951), Vol. 3, No. 1 (April 1953), Vol. 4, No. 3 (August 1955), Vol. 6, No. 3 (November 1958), Vol. 9, No. 3 (November 1962), Vol. 12, No. 3 (November 1965), Vol. 15, No. 1 (March 1968), Vol. 19, No. 1 (March 1972), and Vol. 21, No. 2 (July 1974). Mrs. Salda prepared the bibliographies that were published in Vol. 25, No. 1 (March 1978), Vol. 26, No. 2 (June 1979), and Vol. 27, No. 2 (June 1980). Although most of the Fund's official publications are included, this is not intended to be a complete bibliography of such publica- tions. A Abalo, Carlos. "The IMF and the World Bank in the face of a new recession," Comerdo Exterior de Mexico, English edition (Mexico, D.F.), 27 (February 1981), pp. 60-66. *Mrs. Salda, Bibliographer in the Joint Bank-Fund Library, is a graduate of Oxford University. She was formerly on the staff of the Victoria & Albert Museum Library in London. 281 ©International Monetary Fund. Not for Redistribution 282 ANNE C.M. SALDA Abdalla, Ismail-Sabri. "The Inadequacy and loss of legitimacy of the Interna- tional Monetary Fund," Development Dialogue (Uppsala), No. 2 (1980), pp. 25-53. A slightly shorter version with same title in International Devel- opment Review (Rome), 22, No. 4 (1980), pp. 46-65. Abraham, Jean-Paul, and Theo Peeters. "La Scene monetaire internationale en 1981," in Sy steme monetaire europeen et re forme monetaire mondiale; con- ference organisee sous le patronage de la Fondation Camille Gutt, Bruges, Bruxelles, 4-6 juin, 1981, Jean-Paul Abraham and Michel Vanden Abeele, eds. (Brussels, Editions de 1'Universite de Bruxelles, 1981), pp. 23-68. Spanish translation with title, "La Escena monetaria internacional a medi- ados del ano 1981," in Informacion Comercial Espanola (Madrid), No. 577 (September 1981), pp. 59-82. Acevedo Gar at, Miguel. "El Sistema monetario internacional: implicaciones para los paises en desarrollo," Comercio Exterior, Banco Nacional de Comercio Exterior (Mexico, D.F.), 31 (July 1981), pp. 736-46. Ahluwalia, Montek S., and Frank J. Lysy. "Employment income distribution and programs to remedy balance-of-payments difficulties," in Economic stabilization in developing countries, William R. Cline and Sidney Wein- traub, eds. (Washington, Brookings Institution, 1981), pp. 149-89. Paper presented at a conference organized by the Brookings Institution, held in Washington, October 25-26, 1979. With discussion. "Aid is not a long-term solution," An-Nahar Arab Report & Memo (Beirut), 4 (July 21, 1980), pp. 1-2. Discusses the problems of the developing nations and the extent to which IMF loans can help them. Alessandrini, Alessandro. "L'Intermediazione bancaria internazionale: evo- luzione del passato e prospetti attuali," Bancaria (Rome), 37 (February 1981), pp. 132-39. Ali, Ali Abdalla. "Is the 'Arusha initiative' the answer?" IFDA Dossier, International Foundation for Development Alternatives (Nyon, Switzer- land), No. 25 (September/October 1981), pp. 81-85. Al-Najafi, Hassan. "Saradnja arapskih zemalja i medunarodni monetarni sis- tern," Finansije (Belgrade), 36 (January/February 1981), pp. 3-15. Altmann, Jorn. "Liquidity problems of developing countries and the Interna- tional Monetary Fund's system of facilities," Economics (Tubingen), 23 (1981), pp. 30-51. Andreatta, Benjamin. "Problemi dello sviluppo nel mondo e del suo finanzia- mento," Bancaria (Rome), 37 (February 1981), pp. 129-31. With English summary, p. 117. Andriamirado, Sennen. "Quand la 'verite des prix' declenche 1'emeute," Jeune Afrique (Paris), No. 1069 (July 1,1981), pp. 10-11. Describes some popular demonstrations in Africa against the IMF. Angell, Alan, and Rosemary Thorp. "Inflation, stabilization and attempted redemocratization in Peru, 1975-1979," World Development (Oxford), 8 (November *1980), pp. 865-86. Angelopoulos, Angelos. "Ein Interims-Vorschlag: das Recycling der Petro- dollars und die Erhohung des Goldwertes" and "Die Wahrungsreform," in ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 283 his Zu einer nach-keynesianischen Weltwirtschaftspolitik (Wiesbaden, Gab- ler, 1978), pp. 129-55. "Arabs call for reforms at the World Bank and IMF meeting," An-Nahar Arab Report & Memo (Beirut), 4 (October 13, 1980), pp. 4-1. Argy, Victor. "The IMF system," "The Postwar experience, 1946 to 1967," "Reform proposals, Mark I: the early 1960s," "Special drawing rights (SDRs)," "Continuing crises and the breakdown of Bretton Woods," "Deficiencies of the IMF system and reasons for its collapse," and "Re- forms and reform discussions, Mark II, 1968 to 1978," in his The Postwar international money crisis; an analysis (London and Boston, Allen & Un- win, 1981), pp. 21-67, 98-115. Arnold, Guy. "Development problems and multilateral aid ... The Interna- tional Monetary Fund," "Zambia," and "Zaire," in his Aid in Africa (Lon- don, Kogan Page; New York, Nichols, 1979), pp. 141-43, 177-81, 192-98. Artus, Jacques R., and Andrew D. Crockett. "National sovereignty and interna- tional cooperation over exchange rates," Case Western Reserve Journal of International Law (Cleveland, Ohio), 12 (Spring 1980), pp. 327-39. 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A briefer version with same title reprinted in Atlantic Community Quarterly (Washington), 18 (Fall 1980), pp. 370-80. "Auf dem Weg zum Substitutionskonto? Vor der Hamburger Tagung des IMF- Interimsausschusses," Neue Ziircher Zeitung (Zurich), Fernausgabe No. 95 (April 25, 1980), p. 11. "Auftakt zur Konference von Libreville; reduzierte Wunschlist der Entwick- lungslander," Neue Ziircher Zeitung (Zurich), Fernausgabe No. 116 (May 22, 1981), pp. 13-14. Australia, Department of the Treasury. International monetary agreements act: annual reports (Canberra, 1977-80). Four reports: Financial year 1976-77; Financial year 1977-78; Financial year 1978-79; Financial year 1979-80. Ayre, P.C.I., and Subrata Ghatak. "International liquidity, less developed coun- tries and special drawing rights," in Monetary economics in develop- ing countries, by Subrata Ghatak (New York, St. Martins Press, 1981), pp. 115-33. ©International Monetary Fund. Not for Redistribution 284 ANNE C.M. SALDA B BJ. "Conditionality and the role of the IMF," Economic and Political Weekly (Bombay), 15 (November 22, 1980), pp. 1983-88. Bach, George Leland. "Current balance-of-payments problems," in his Eco- nomics; an introduction to analysis and policy (Englewood Cliffs, New Jer- sey, Prentice-Hall, 10th edition, 1980), pp. 598-609. Bacha, Edmar Lisboa, and Carlos F. Diaz Alejandro. "The Pax americana" and "Systemic issues for the 1980s," in their Financial markets: a view from the periphery, Discussion Paper, No. 367, Economic Growth Center, Yale Uni- versity (New Haven, Connecticut, 1981), pp. 5-9, 40-55. (Mimeographed) Baird, Jane. "Michael Manley against the world," Institutional Investor, Interna- tional Edition (New York), October 1980, pp. 47-52. Discusses Jamaica's economic problems, and suggests that the time has come for the IMF to consider a softer line on Jamaica. Bakker, A.F.P. "De Beleidscondities van het Internationale Monetaire Fonds," Economisch-Statistische Berichten (Rotterdam), 66 (February 18, 1981), pp. 152-59. "Balango do Fundo Monetaria Internacional; profundas alteragoes na economia mundial nas tres ultimas decadas," Revista Bancdria Brasileira (Rio de Janeiro), 49 (November 30, 1980), pp. 17-19. Balogh, Thomas. "Oil recycling: the need for a new lending facility?" Lloyds Bank Review (London), No. 137 (July 1980), pp. 16-29. "Banks now favour the SDR option," South; the Third World Magazine (Lon- don), No. 5 (February/March 1981), pp. 77-79. Baqai, Moinuddin. "A New framework for international financial cooperation for development," Trade and Development; an UNCTAD Review (Geneva), No. 1 (Spring 1979), pp. 39-51. Barata, Jose Martins. "A Economia portuguesa a caminho da miseria: para onde vai Portugal, pelas maos do FMI e seus mandataries, desde 1976," Eco- nomia EC (Lisbon), August/September 1979, pp. 60-70. Bareau, Paul. The Disorder in world money; from Bretton Woods to SDRs, Institute of Economic Affairs, Occasional Paper, No. 61; Wincott Memorial Lecture, No. 12 (London, Institute of Economic Affairs for the Wincott Foundation, 1981), 32 pp. Lecture delivered October 22, 1981. ."SOS for SDRs," Journal of the Institute of Bankers (London), 101 (April 1980), p. 45. Bargel^me, Massoud. Die Sonderziehungsrechte im internationalen Wdhrungs- system (Berlin, Duncker & Humblot, 1981), 160 pp. With English summary, p. 154. Barrie, G.N. "The International Monetary Fund," South African Banker (Jo- hannesburg), 77 (November 1980), pp. 164-66. Basagni, Fabio. "Approaches to the prudential supervision of international lend- ing," in Banks and the balance of payments: private lending in the inter- national adjustment process, by Benjamin J. Cohen in collaboration with Fabio Basagni (Montclair, New Jersey, Allanheld, Osmun; London, Croom Helm, 1981), pp. 147-69. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 285 Batchelder, Alan B., and Kanji Haitani. "The International monetary system before March 1973," "The Present international monetary system," and "Issues and problems in the present system," in their International eco- nomics: theory and practice (Columbus, Ohio, Grid Publishing, 1981), pp. 355-421. Bauer, P.T. "The Link scheme of aid," in his Equality, the third world and economic delusion (Cambridge, Massachusetts, Harvard University Press, 1981), pp. 151-55. Bekolo-Ebe, Bruno. "Les Mesures de 'stabilisation' du F.M.I, et le desequilibre exterieur dans les pays en voie de developpement," Presence Africaine (Paris), No. 2 (1979), pp. 13-28. Bergsten, C. Fred. "The International monetary system in the 1980s," in his The World economy in the 1980s: selected papers of C. Fred Bergsten, 1980 (Lexington, Massachusetts, Lexington Books, 1981), pp. 25-37. Originally presented at the Center for International Business in Dallas, Texas, Octo- ber 28, 1980. . "Recycling and the international lending system," in his The Interna- tional economic policy of the United States: selected papers of C. Fred Bergsten, 1977-1979 (Lexington, Massachusetts, Lexington Books, 1980), pp. 63-68. Originally presented before the Subcommittee on Financial Insti- tutions Supervision, Regulations and Insurance of the Committee on Bank- ing, Finance and Urban Affairs of the U.S. House of Representatives, April 5, 1977. . "Recycling the world's surpluses and deficits: challenge and response," in his The World economy in the 1980s: selected papers of C. Fred Bergsten, 1980 (Lexington, Massachusetts, Lexington Books, 1981), pp. 39-48. Origi- nally presented at the Annual Conference of the National Association of Accountants, New Orleans, June 16, 1980. . "Statement" and "Prepared statement," in International Monetary Fund and related legislation; hearings before the Subcommittee on International Finance, 96th Congress, 2nd Session on S. 2514 ... , S. 2271 ... , S. 1963 ..., March 31 and April 15-16, 1980, U.S. Congress, Senate, Committee on Banking, Housing and Urban Affairs (Washington, Government Print- ing Office, 1980), pp. 1-21. Reprinted with title, "The Role of the Interna- tional Monetary Fund," in his The World economy in the 1980s: selected papers of C. Fred Bergsten, 1980 (Lexington, Massachusetts, Lexington Books, 1981), pp. 49-60. . "Statement" and "Prepared statement," In North-South dialog: progress and prospects; hearings before the Subcommittees on International Economic Policy and Trade and on International Organizations, 96th Con- gress, 2nd Session, U.S. Congress, House, Committee on Foreign Affairs (Washington, Government Printing Office, 1980), pp. 126-38. . "Statement" and "Prepared statement: The International monetary system; current problems and policy needs," in Oversight hearings on U.S. international monetary policies; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 97th Congress, 1st Session, November 4 and 5; and December 10,1981, U.S. Congress, House, Committee on Banking, Finance and Urban Affairs (Washington, Govern- ment Printing Office, 1982), pp. 2-16. ©International Monetary Fund. Not for Redistribution 286 ANNE C.M. SALDA Berney, Karen, and Dori Jones. "China's activities in the IMF and World Bank," China Business Review (Washington), 8 (March/April 1981), pp. 47-48. Bernstein, Edward M. "Statement" and "Prepared statement: Is a return to the gold standard feasible?" in Feasibility of a return to the gold standard; oversight hearing before the Subcommittee on Mines and Mining of the Committee on Interior and Insular Affairs ... 96th Congress, 2nd Session, October 2,1980, U.S. Congress, House, Committee on Interior and Insular Affairs (Washington, Government Printing Office, 1980), pp. 27-37, 148-60. Berthoud, Roger. "The Brandt Commission's report: monetary reforms are needed," Times (London), February 25, 1980, p. 6. Bessis, Sophie. "Faut-il bruler le FMI?" Jeune Afrique (Paris), No. 1069 (July 1,1981), pp. 11-13. Describes some popular demonstrations in Africa against the IMF. Beveridge, W.A., and Margaret R. Kelly. "Fiscal content of financial pro- grams supported by stand-by arrangements in the upper credit tranches, 1969-78," Staff Papers, International Monetary Fund (Washington), 27 (June 1980), pp. 205-49. Bhaduri, Amit. "Renegotiation of third world debt and appropriate adjustments in international trade," in The Financial issues of the new international economic order, Jorge Lozoya and A.K. Bhattacharya, eds., UNITAR- CEESTEM Library on NIEO (New York, Pergamon Press, 1980), pp. 129-51. Bhagwat, Avinash. "International monetary stability; challenges and response," Finance & Development (Washington), 17 (December 1980), pp. 3-5. . "The Quest for successful adjustment in the world economy; a report on the Fund's annual meeting," Finance & Development (Washington), 18 (December 1981), pp. 10-12. Bhattacharya, A.K., and Michael Hudson. "A Regional strategy to finance the new international economic order," in Regionalism and the new interna- tional economic order, Davidson Nicol, Luis Echeverria, and Aurelio Pec- cei, eds. (New York and Oxford, Pergamon Press, 1981), pp. 299-317. Bigman, David. "Exchange rate management: needs, ways, and means," in The Functioning of floating exchange rates: theory, evidence, and policy impli- cations, David Bigman and Teizo Taya, eds. (Cambridge, Massachusetts, Ballinger, 1980), pp. 279-317. Bird, Graham. Balance of payments stabilisation policy in developing countries, Overseas Development Institute, Working Paper, No. 5 (London, 1981), 50 pp. (Mimeographed) . "Commercial borrowing by less developed countries," Third World Quarterly (London), 2 (April 1980), pp. 270-82. Concludes that the avail- ability of concessionary finance through the IMF rather than commer- cial borrowing will be the crucial factor in determining the economic growth rate of low-income less developed countries. -. "Developing country finances, present and future," Futures (Guild- ford), 13 (June 1981), pp. 191-205. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 287 —. "Financial flows to developing countries: the role of the International Monetary Fund," Review of International Studies (Sevenoaks, England), 7 (April 1981), pp. 91-105. —. "Financing balance of payments deficits in developing countries: the roles of official and private sectors and the scope for cooperation between them," Third World Quarterly (London), 3 (July 1981), pp. 473-88. —. The IMF and the developing countries: evolving relations, use of re- sources and the debate over conditionality, Overseas Development Institute, Working Paper, No. 2 (London, 1981), 37 pp. —. "The IMF as a source of international finance for developing countries," Indian Journal of Economics (Allahabad), 60 (April 1980), pp. 393-442. —. "On using international monetary reform for the benefit of developing countries," Economic Notes, Monte dei Paschi di Siena (Siena), 10, No. 1 (1981), pp. 29-45. . "Reserve currency consolidation, gold policy and financial flows to developing countries; mechanisms for an aid-augmented substitution ac- count," World Development (Oxford), 9 (July 1981), pp. 609-19. . "Some proposals for increasing the size and improving the nature of financial flows to developing countries," Rivista Internazionale di Scienze Economiche e Commerciali (Milan), 27 (October/November 1980), pp. 1038-54. . "SDR distribution, interest rates and aid flows," The World Economy (Oxford), 4 (December 1981), pp. 419-27. . "The Terms of trade of developing countries: theory, evidence and policy," Economia Internazionale (Genoa), 32 (November 1979), pp. 399-413. . "Why a new international development organization is needed," Inter- economics (Hamburg), No. 4 (July/August 1980), pp. 185-87. -, and Peter Gutmann. "Foreign aid: the issues," Quarterly Review, Na- tional Westminster Bank (London), August 1981, pp. 36-51. Bird, Graham, and Timothy Orme. "An Analysis of drawings on the Interna- tional Monetary Fund by developing countries," World Development (Ox- ford), 9 (June 1981), pp. 563-68. Birnbaum, Eugene A. "The IMF's new lending power," Wall Street Journal (New York), September 29, 1980, p. 30. Black, Stanley W. "Central bank intervention and the stability of exchange rates," in Exchange risk and exposure; current developments in interna- tional financial management, Richard M. Levich and Clas G. Wihlborg, eds. (Lexington, Massachusetts, Lexington Books, 1980), pp. 137-51. Discusses the problems of defining intervention targets in an operational way and of following the guidelines for intervention issued by the IMF. With comment by Michael P. Dooley. . "The Impact of changes in the world economy on stabilization policies in the 1970s," in Economic stabilization in developing countries, William R. Cline and Sidney Weintraub, eds. (Washington, Brookings Institution, 1981), pp. 43-81. Paper presented at a conference organized by the Brook- ©International Monetary Fund. Not for Redistribution 288 ANNE C.M. SALDA ings Institution, held in Washington, October 25-26, 1979. With comments by Sidney Dell, and discussion. Blake, David. "A Crisis of identity for the IMF," Times (London), May 22, 1981, p. 19. . "Currencies in crisis," Times (London), January 3, 1980, p. 15. . "Stumbling into a new world monetary system," Times (London), Octo- ber 13, 1980, p. 17. . "Where is the IMF heading?" Times (London), October 2,1980, p. 21. Blancpain, Jean-Pierre. "New chapter for Bretton Woods?" Swiss Review of World AffairsS Zurich), 31 (November 1981), pp. 16-17. Bonnet, Nicole. "En Bolivie : La Paz compte sur le F.M.I, pour echapper a la banquerote," Le Monde (Paris), October 27, 1981, p. 42. Bosello, Franco. "II Sistema di Bretton Woods" and "Nuove struttore e nuove prospettive," in his Analisi economica e cooperazione internazionale per lo sviluppo (Bologna, Patron, 1978), pp. 99-114, 159-80. Bouey, Gerald K. The International monetary system: key issues (Ottawa, 1980), 27 pp. (Mimeographed) Background paper for remarks at the 33rd Inter- national Banking Summer School, Banff, Alberta, September 1, 1980. French translation with title, Les Grandes questions relatives au systeme monetaire international (Ottawa, 1980), 30 pp.; and Spanish translation with title, "Cuestiones fundamentales del sistema monetario internacional," in Boletin, Centre de Estudios Monetarios Latinoamericanos (Mexico, D.F.), 27 (January/February 1981), pp. 8-16. Brainard, Lawrence J. Poland and the IMF (No place of publication, 1981), 5 pp. (Mimeographed) German translation with title, "Polen und der IMF: Ein- schaltung des IMF in die Refinanzierungsbemuhungen?" in Neue Zurcher Zeitung (Zurich), Fernausgabe No. 70 (March 26, 1981), p. 10. The Brandt Commission papers; selected background papers prepared for the Independent Commission on International Development Issues, 1978-1979 (Geneva and The Hague, Independent Bureau for International Develop- ment Issues, 1981), 764 pp. "Brandt Commission proposals for reform of monetary system stress role of SDR," IMF Survey (Washington), 9 (March 3, 1980), pp. 68-69. Brau, Eduard. "The Consultation process of the Fund," Finance & Development (Washington), 18 (December 1981), pp. 13-16. Brill, Daniel H. "The Changing role of the United States in the world economy," in Europe and the dollar in the world-wide disequilibrium, J.R. Sargent, ed. (Alphen aan den Rijn, Sijthoff & Noordhoff, 1981), pp. 19-36. Originally presented at the eighth colloquium organized by the Societe Universitaire Europeenne de Recherches Financieres (SUERF), held in Basle, May 1979. Includes a discussion of the changing role of the United States in the interna- tional financial system. Bristow, L. "Gold franc—replacement of unit of account," Lloyd's Maritime and Commercial Law Quarterly (London), February 1978, pp. 31-38. An amended version of a paper presented at the Seminar on International Road Haulage, held at the London Press Centre, October 5, 1977. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 289 Brodsky, David, Gerry Helleiner, and Gary Sampson. "The Impact of the current exchange rate system on developing countries," Trade and Develop- ment; an UNCTAD Review (Geneva), No. 3 (Winter 1981), pp. 31-52. Brodsky, David A., and Gary P. Sampson. "Gold, special drawing rights and developing countries," Trade and Development; an UNCTAD Review (Geneva), No. 2 (Autumn 1980), pp. 49-68. A discussion of the above article, by Rumman Faruqi, entitled, "The Great gold swindle," in South; the Third World Magazine (London), No! 6 (March/April 1981), pp. 75-79. . "Implications of the effective revaluation of reserve asset gold: the case for a gold account for development," World Development (Oxford), 9 (July 1981), pp. 589-608. -. "The Value of gold as a reserve asset," World Development (Oxford), 8 (March 1980), pp. 175-92. Brookhouse, Roger. "Gold is not a cure-all," Euromoney (London), December 1980, pp. 153-56. Brown, Brendan. "Manufactured currency hybrids," in his The Dollar-mark axis: on currency power (London, Macmillan, 1979), pp. 52-54. Brummer, Alex. "Oil power and politics bring a second problem to the IMF," Guardian (London), September 29, 1980, p. 15. Bruno, Michael. "Short-term policy trade-offs under different phases of eco- nomic development," in The World economic order: past and prospects, Sven Grassman and Erik Lundberg, eds. (New York, St. Martin's Press, 1981), pp. 295-313. Paper originally presented at a conference held in Saltsjobaden, Stockholm, August 1978. Bryant, Ralph C. "Supranational traffic regulations," "A 'World' instrument of macroeconomic policy: changes in outside reserves," "International coordi- nation of national policy decisions," and "A Catalytic role for supranational institutions," in his Money and monetary policy in interdependent nations (Washington, Brookings Institution, 1980 ?), pp. 470-81. Buira, Ariel. "Polfticas de acceso ampliado, obtencion de prestamos y liquidez del Fondo Monetario Internacional," Boletin, Centre de Estudios Mone- tarios Latinoamericanos (Mexico, D.F.), 27 (July 1981), pp. 179-93. Report presented to the 32nd Reunion de Gobernadores de Bancos Centrales Latinoamericanos y de Espana, held in Montevideo, April 1981. . "Recession, inflation and the international monetary system," World Development (Oxford), 9 (December 1981), pp. 115-28. Burns, Tom. "Statement" and "Prepared statement: Two loaves of bread; the impact of the IMF-Peruvian Government economic stabilization program on the Peruvian people," in To amend the Bretton Woods agreements act to authorize consent to an increase in the United States quota in the International Monetary Fund; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 96th Congress, 2nd Session, on H.R. 5970, February 4, 6, 7; March 20; April 1, 21, 1980, U.S. Congress, House, Committee on Banking, Finance and Urban Affairs (Washington, Govern- ment Printing Office, 1980), pp. 58-100. Butcher, Willard C. "How OPEC can help in recycling," Euromoney (London), October 1980, pp. 50-59. Suggests that the OPEC surplus cannot be recy- ©International Monetary Fund. Not for Redistribution 290 ANNE C.M. SALDA cled by the commercial banks alone, that IMF help is needed, and that the IMF will need contributions from the richer OPEC nations. C Cabieses Cubas, Hugo, and Carlos Otero. "Las Medidas anticrisis y la presencia del F.M.I.," "Las Medidas adoptadas," "Lo Implicito en las medidas eco- nomicas," "La 'Solution'," and "Anexo IV: Documentos de las nego- ciaciones con el Fondo Monetario International," in their Economia pern- ana: un ensayo de interpretation (Lima, DESCO, Centre de "Estudios y Promotion del Desarrollo, 1978), pp. 137-46, 167-206. Caffe, Federico. "Notes on some recent transformations at the International Monetary Fund," Economic Notes, Monte dei Paschi di Siena (Siena), 8, No. 1 (1979), pp. 3-11. Cairncross, Frances. "If banks can't recycle OPEC's cash to the poor, we need to find another way fast," Guardian (London), October 4, 1980, p. 19. Caldwell, J. Alexander. "Gold: the fundamentals behind the frenzy," Euro- money (London), February 1980, pp. 110-20. , and Frederick E. Berger. "The Substitution account; not a miracle but a first step," Euromoney (London), May 1980, pp. 158-73. Cameron, Duncan. "Special drawing rights," International Journal (Toronto), 36 (Autumn 1981), pp. 713-31. Campos, Roberto de Oliveira. "Why Brazil believes it is on the right economic track," financial Times World Business Weekly (London), November 3, 1980, pp. 22-23. Defends Brazil's recent economic performance and its attitude toward the IMF. Camps, Miriam. "The Management of money and coordination of macro- economic policy," in her Collective management: the reform of global eco- nomic organizations, 1980s Project/Council on Foreign Relations (New York, McGraw-Hill, 1981), pp. 197-253. . "The New Bretton Woods," International Journal (Toronto), 35 (Spring 1980), pp. 240-62. "Can $220 million IMF loan bail out Sudan's economy?" An-NaharArab Report & Memo (Beirut), 5 (November 2, 1981), pp. 8-10. Canada, Department of Finance. Reports on operations under the Bretton Woods agreements act and the International Development Association act (Ottawa, 1979-80). Two reports: 1979 and 1980. Also published in French with title, Rapport sur les operations effectuees en vertu de la loi sur les accords de Bretton Woods et de la loi sur VAssociation Internationale de Developpement. Carbaugh, Robert. "Special drawing rights," "Facilities for borrowing re- serves," and "The Adequacy of international reserves," in his International economics (Cambridge, Massachusetts, Winthrop, 1980), pp. 406-14. Carlozzi, Nicholas. "Pegs and floats: the changing face of the foreign exchange markets," Business Review, Federal Reserve Bank of Philadelphia (Phila- delphia), May/June 1980, pp. 13-23. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 291 Carlsson, Torsten. "The Future of the international monetary system," Quar- terly Review, Skandinaviska Enskilda Banken (Stockholm), Nos. 1/2 (1980), pp. 19-28. . "The International monetary system: development and experience dur- ing the postwar period," Quarterly Review, Skandinaviska Enskilda Banken (Stockholm), Nos. 3/4 (1979), pp. 85-95. Carreau, Dominique, Patrick Juillard, and Thiebaut Flory. "Le Fonds Mone- taire International de 1945 a 1971:1'age d'or" and "Les Crises et la reforme du systeme de Bretton-Woods," in their Droit international economique (Paris, Librairie Generate de Droit et de Jurisprudence, 2nd edition, 1980), pp. 108-80. Carroll, J. Speed. "A Dollar is a rose is an SDR unless it's a CD or a bond," Euromoney (London), August 1981, pp. 97-98. Suggests that the existence of bonds and certificates of deposit based on differing definitions of the SDR may produce awkward reality. Carter, H., and I. Partington. "The Bretton Woods system" and "Managed floating," in their Applied economics in banking and finance (Oxford, Oxford University Press, 2nd edition, 1981), pp. 270-312. "The Case for substitution," Economist (London), 274 (February 23, 1980), p. 274. Caso, Agustin. "Changing patterns in international liquidity and Eurocurrency multipliers," in The Financial issues of the new international economic order, Jorge Lozoya and A.K. Bhattacharya, eds., UNITAR-CEESTEM Library on NIEO (New York, Pergamon Press, 1980), pp. 177-95. Caves, Richard E., and Ronald W. Jones. "International reserves and liquidity," in their World trade and payments; an introduction (Boston, Little, Brown, 3rd edition, 1981), pp. 447-64. "The Central Bank of Nigeria and international monetary relations," in Twenty years of central banking in Nigeria: 1959-1979 (Lagos, Research Depart- ment, Central Bank of Nigeria, 1979), pp. 179-203. Chacholiades, Miltiades. "The International monetary system," in his Principles of international economics (New York, McGraw-Hill, 1981), pp. 543-65. Chandavarkar, Anand G. "Exchange rate system," in SEANZA lectures, 1978; lectures delivered at the twelfth SEANZA central banking course held in Seoul, September ^-November 10, 1978, SEANZA Central Banking Course, 12th, Seoul, 1978 (Seoul, Bank of Korea, 1979), pp. 233-43. Focuses on problems and policies of exchange rate arrangements in the context of the Second Amendment of the Articles of Agreement of the IMF, which came into force on April 1, 1978. "Changing the power balance," Far Eastern Economic Review (Hong Kong), 108 (April 25, 1980), p. 85. Suggests that China could emerge as the third world's monetary affairs leader following its admission to the IMF. Chapoy Bonifaz, Alma de Maria. "Agudizacion de los trastornos monetarios" and "La Crisis economica internacional: sus repercusiones en el tercer mundo," in her Ruptura delsistema monetario internacional (Mexico, D.F., Universidad Nacional Autonoma de Mexico, 1979), pp. 43-139. Cheney, David M. "Adjusting to a multi-reserve system," International Finance, Chase Manhattan Bank (New York), 16 (February 2, 1981), pp. 7-8. ©International Monetary Fund. Not for Redistribution 292 ANNE C.M. SALDA Chistyakov, Nikolai Evgen'evich. "Uchastie Mezhdunarodnogo valiutnogo fonda na rynke kapitalov," in Sovremennyi rynok kapitalov, Georgii Pavlovich Solius, ed. (Moscow, Finansy, 1977), pp. 146-58. Christopher, Paul. "The New man on the Interim Committee," Euromoney (London), October 1981, pp. 320-25. Discusses the election of Allan MacEachen as chairman of the IMF Interim Committee. Chrystal, Kenneth A. "The Choice of reserve instruments," in Systeme mo- netaire europeen et reforme monetaire mondiale; conference organisee sous le patronage de la Fondation Camille Gutt, Bruges, Bruxelles, 4--6juin, 1981, Jean-Paul Abraham and Michel Vanden Abeele, eds. (Brussels, Editions de 1'Universite de Bruxelles, 1981), pp. 303-15. With discussion, pp. 367-68. . "International liquidity and the position of developing countries in the 1980s," in Measures to strengthen the SDR: supporting papers; report to the Group of Twenty-Four, United Nations document UNCTAD/MFD/TA/12 (Geneva? 1981), pp. 1-19. Report prepared under UNDP/UNCTAD Project INT/75/015, Sidney Dell, director of the project. Cirovic, Milutin. "Perspektive medunarodnog monetarnog sistema u os- amdesetim godinama," Finansije (Belgrade), 35 (September/October 1980), pp. 655-67. Cleveland, Harold van B. "Statement" and "Prepared statement," in To amend the Bretton Woods agreements act to authorize consent to an increase in the United States quota in the International Monetary Fund; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 96th Congress, 2nd Session, on H.R. 5970, February 4, 6, 7; March 20; April 1, 21, 1980, U.S. Congress, House, Committee on Banking, Finance and Urban Affairs (Washington, Government Printing Office, 1980), pp. 268-88. , and Ramachandra Bhagavatula. "The Continuing world economic cri- sis," Foreign Affairs (New York) 59, No. 3 (1981), pp. 594-616. The authors discuss the economic scene in 1980 and conclude that economic recovery in the West and in the world at large demands a monetary reform that has international as well as domestic dimensions. Cline, William R. "The Brandt Commission report: economic analysis and polit- ical compromise," Trade and Development; an UNCTAD Review (Geneva), No. 2 (Autumn 1980), pp. 39-48. Discusses some of the recommendations of the Brandt report, including external debt and recycling, the interna- tional monetary system, and institutions. . "Economic stabilization in Peru, 1975-78," in Economic stabilization in developing countries, William R. Cline and Sidney Weintraub, eds. (Wash- ington, Brookings Institution, 1981), pp. 297-334. With comments by Daniel M. Schydlowsky, and discussion. . "Statement" and "Prepared statement: The Magnitude and conditions of lending by the International Monetary Fund," in To amend the Bretton Woods agreements act to authorize consent to an increase in the United States quota in the International Monetary Fund; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 96th Congress, 2nd Session, on H.R. 5970, February 4, 6, 7; March 20; April 1, 21, 1980, U.S. Congress, House, Committee on Banking, Finance and Urban Affairs (Washington, Government Printing Office, 1980), pp. 128-44. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 293 , and Sidney Weintraub. "Introduction and overview," in Economic sta- bilization in developing countries, William R. Cline and Sidney Weintraub, eds. (Washington, Brookings Institution, 1981), pp. 1-42. Introduction to the papers and proceedings of a conference organized by the Brookings Institution, held in Washington, October 25-26, 1979. Cobham, David. "The International monetary system," in his The Economics of international trade (Cambridge, England, Woodhead-Faulkner in associ- ation with Lloyds Bank, 1979), pp. 73-82. Coffey, Peter. "The Use of reserve assets in the framework of a European economic and monetary union and world monetary reform," in Systeme monetaire europeen et reforme monetaire mondiale; conference organisee sous le patronage de la Fondation Camille Gutt, Bruges, Bruxelles, 4-6juin, 1981, Jean-Paul Abraham and Michel Vanden Abeele, eds. (Brussels, Edi- tions de 1'Universite de Bruxelles, 1981), pp. 347-50. Cohen, Benjamin J. Implications of the European Monetary System for devel- oping countries: report to the Group of Twenty-Four, United Nations Docu- ment UNCTAD/MFD/TA/10 (Geneva? 1981), 34, 4, 6, 8 pp. (Mimeo- graphed) Report prepared under UNDP/UNCTAD Project INT/75/015, Sidney Dell, director of the project. . "The SDR, the IMF, and monetary reform" and "Conclusions," in his The European monetary system: an outsider's view, Essays in International Finance, No. 142, Princeton University (Princeton, 1981), pp. 21-25. "The Transformation of the liquidity creation process" and "Ten coun- try studies: principal findings," in his Banks and the balance of payments: private lending in the international adjustment process, Atlantic Institute for International Affairs Research Volume (Montclair, New Jersey, Allanheld, Osmun; London, Croom Helm, 1981), pp. 3-42. "Compte-rendu du premier symposium organise par le Centre africain d'Etudes monetaires sur la theorie et la politique monetaire en Afrique (Dakar) 21-24 Janvier 1980," Banque Centrale des Etats de I'Afrique de I'Ouest, Notes d'information et Statistiques (Dakar), No. 68 (January 1980), pp. 3-6. Includes address by J. de Larosiere. Cook, Stephen. "Is it better to oppose Cuba or the IMF?" Guardian (London), October 27, 1980, p. 13. Examines the policies of the rival party leaders in the Jamaican elections. Cooper, Richard N. World monetary system in the 1980s, Current Policy, No. 239, U.S. Department of State, Bureau of Public Affairs (Washington, 1980), 4 pp. Address before the Foreign Trade Council, New York, Octo- ber 21, 1980. Corden, W.M. "The Dollar and the substitution account," in his Inflation, exchange rates and the world economy (Chicago, University of Chicago Press, 2nd edition, 1981), pp. 167-69. Costa Rica, Ministerio de Hacienda. Propuesta del Gobierno de Costa Rica ante el Fondo Monetario Internacional (San Jose, Costa Rica? 1981), 39, [35] pp. Costabel, Attilio M. "Gold values in carriage of goods conventions—an up-to- date review," Lloyd's Maritime and Commercial Law Quarterly (London), August 1979, pp. 326-30. "Countering the critics," South; the Third World Magazine (London), No. 7 ©International Monetary Fund. Not for Redistribution 294 ANNE C.M. SALDA (April/May 1981), pp.71-77. Includes a discussion of the scheme proposed by D. Brodsky and G. Sampson concerning the IMF gold holdings, S. Burki's support for a gold development account, and C. Raghavan's analysis of various criticisms of the Brodsky and Sampson plan. Coussement, Andre M. "Why the bond market should open up for developing countries," Euromoney (London), August 1980, pp.117-27. Examines the various sources of external financing open to the developing countries, including the syndicated credit market, the external bond markets, and the IMF. Crawford, Malcolm. Currencies in a floating world, EIU Special Report, No. 35 (London, Economist Intelligence Unit, revised and reprinted, 1978), 145 pp. La Crise monetaire Internationale, Le Monde: Dossiers et Documents, No. 41 (Paris, 1977), 4 pp. Crockett, Andrew D. "The International Monetary Fund" and "International monetary cooperation since the war," in his Money: theory, policy and institutions (Sunbury-on-Thames, Nelson, 2nd edition, 1979), pp. 222-52. . "The Role of the authorities and public institutions at the world level," in Systeme monetaire europeen et reforme monetaire mondiale; conference organisee sous le patronage de la Fondation Camille Gutt, Bruges, Bruxelles, 4-6juin, 1981, Jean-Paul Abraham and Michel Vanden Abeele, eds. (Brus- sels, Editions de TUniversite de Bruxelles, 1981), pp. 215-32. With dis- cussion, pp. 297-300. Crump, Thomas. "The Bretton Woods period and its aftermath," in his The Phenomenon of money (London, Routledge & Kegan Paul, 1981), pp. 238-42. Cuenca Garcia, Eduardo. "La Reforma del Fondo Monetario Internacional: una parioramica," Informacion Comercial Espanola (Madrid), No. 577 (Sep- tember 1981), pp. 95-101. Cutajar, Michael Zammit. "Background notes on the International Monetary Fund," Development Dialogue (Uppsala), No. 2 (1980), pp. 95-112. Com- piled for the South-North Conference on the International Monetary System and the New International Order, held at Arusha, Tanzania, June 30-July 3, 1980. D Daniel, Philip. "The New recycling: economic theory, IMF conditionality and balance of payments adjustment in the 1980s," IDS Bulletin, Institute of Development Studies, University of Sussex (Brighton), 13 (December 1981), pp. 27-37. Danneman, Werner. "Activities of the Bureau of Statistics of the International Monetary Fund," Review of Public Data Use (New York), 8 (October 1980), pp. 251-63. Davidson, Ian. "Time to give away the IMF," Financial Times (London), Feb- ruary 20, 1981, p. 16. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 295 Davies, Brinley. "The Experience of the International Monetary Fund system" and "Proposals for world monetary reform," in his The United Kingdom and the world monetary system (London, Heinemann Educational Books, 3rd edition, 1979), pp. 49-70, 90-98. Davis, Christopher. Financing third world debt, Chatham House Papers, No. 4 (London, Royal Institute of International Affairs, 1979), 37 pp. de Groote, Jacques. "Europe's possible contribution to world monetary prob- lems," in Systeme monetaire europeen et reforme monetaire mondiale; con- ference organisee sous le patronage de la Fondation Camille Gutt, Bruges, Bruxelles, 4-6 juin, 1981, Jean-Paul Abraham and Michel Vanden Abeele, eds. (Brussels, Editions de 1'Universite de Bruxelles, 1981), pp. 281-87. de Larosiere, Jacques. "Challenges of current situation are reviewed by de Larosiere at bankers' meeting," IMF Survey (Washington), 10 (April 6, 1981), pp. 102-105. The text of an address, "The Challenges facing the International Monetary Fund," delivered to the annual conference of the Association of Reserve City Bankers, held in Palm Beach, Florida, April 6, 1981. . "De Larosiere says commitment to strong adjustment policies is crucial in current situation," IMF Survey (Washington), 10 (July 20, 1981), pp. 222-27. Address delivered to the United Nations Economic and Social Council in Geneva, July 3, 1981. . "L'energie et 1'economie mondiale," Politique Etrangere (Paris), 45 (September 1980), pp. 705-20. . "Exchange rates and the adjustment process," in The Functioning of floating exchange rates: theory, evidence, and policy implications, David Bigman and Teizo Taya, eds. (Cambridge, Massachusetts, Ballinger, 1980), pp. 375-81. Adapted from a speech delivered in Paris, October 29, 1979 at a luncheon organized by the International Herald Tribune and Forex Re- search Limited. . "Expanded role for Fund emphasized ... Success in channeling oil surpluses could benefit world economy," IMF Survey (Washington), 9 (June 3, 1980), pp. 161, 169-74. The text of an address, "Energy and the world economy: a medium-term perspective," presented to the In- ternational Monetary Conference held in New Orleans, Louisiana, June 3, 1980. . "Le Foncjs Monetaire et les grands problemes de 1'economie mondiale," Banque (Paris), No. 408 (July 1981), pp. 807-12. Address to the Institut d'Etudes Bancaires et Financieres, Paris, May 26,1981. German translation with title, "Der Internationale Wahrungsfonds und die Hauptprobleme der Weltwirtschaft," in Europa-Archiv (Bonn), 36 (August 10, 1981), pp. 451-60. . "Fund support in underpinning adjustment programs in Africa stressed by Managing Director," IMF Survey (Washington), 9 (January 21, 1980), pp. 23-28. Inaugural address to the 1980 Symposium on Monetary Theory and Policy in Africa, organized by the African Centre for Monetary Studies and held in Dakar, January 21-24, 1980. Reprinted with title, "Inaugural address by the Managing Director to the 1980 Symposium on Monetary Theory and Policy in Africa," in Monetary theory and policy in Africa ©International Monetary Fund. Not for Redistribution 296 ANNE C.M. SALDA (Dakar, African Centre for Monetary Studies of the Association of African Central Banks, 1981), pp.11-27. Spanish translation with title, "El Papel del FMI en la formulation y aplicacion de politicas de ajuste para los paises africanos," in Boletin, Centro de Estudios Monetarios Latinoamericanos (Mexico, D.F.), 26 (March/April 1980), pp. 79-84. . "Managing Director tells ACC: Recycling and adjustment must be joint, mutually reinforcing," IMF Survey (Washington), 9 (May 19, 1980), pp. 145,155-57. Excerpts from an address to the Administrative Committee on Coordination (ACC), Vienna, April 2, 1980. . "Managing Director tells ECOSOC he foresees sufficient resources for expanded Fund recycling role," IMF Survey (Washington), 9 (July 7,1980), pp. 202-206. Address presented to the United Nations Economic and Social Council in Geneva, July 4,1980. Portugese version of the address with title, "Como o FMI ve a economia mundial a curto prazo: tres problemas graves; a inflagao, o crescimento real e o balango de pagamentos," in Revista Bancdria Brasileiro (Rio de Janeiro), 48 (August 30, 1980), pp. 22-24. A slightly different version of the address with title, "Policy prescriptions for a faltering global economy," in Institutional Investor, International Edition (New York), September 1980, pp. 25, 30. . "Managing Director's address: Demographic outlook underscores urgency of adjustment and growth," IMF Survey (Washington), 10 (August 17,1981), pp. 245-50. The text of an address on economic cooper- ation and world stability to the 24th International Seminar for Diplomats, Salzburg, Austria, August 8, 1981. Portuguese version with title, "Eco- nomia internacional: cooperagao para a estabilidad," in Revista Bancdria Brasileira (Rio de Janeiro), 49 (September 30, 1981), pp. 31-34. . "Managing Director's address: 'Grim' world economic situation presents major policy changes," IMF Survey (Washington), 10 (May 18, 1981), pp. 149-52. Text of an address, "Prospects for the world economy and the role of the International Monetary Fund," to the Commonwealth Club of California, San Francisco, May 8, 1981. . "Managing Director's address ... Substantial borrowing seen as essen- tial if Fund is to meet needs of its members," IMF Survey (Washington), 10 (February 9, 1981), pp. 33-36. Summary and text of an address entitled, "The International Monetary Fund between conservatism and innovation," delivered to a symposium of the European Management Forum in Davos, Switzerland, February 3, 1981. Portuguese translation of the address with title, "Conservadorismo ou inova^ao? Dilema que foi apresentado ao Fun- do Monetario Internacional," in Revista Bancdria Brasileira (Rio de Jan- eiro), 49 (February 28, 1981), pp. 27-30. . "Problems of the world economy, role of the Fund are discussed by de Larosiere in China speech," IMF Survey (Washington), 10 (November 9, 1981), pp. 350-54. Address delivered in the Hall of the Chinese People's Political Consultative Conference, Beijing, October 27, 1981. . "Recycling: needs of countries compared with market capacity," IMF Survey (Washington), 9 (November 10, 1980), pp. 346-51. The text of an address, "Recycling needs and the capital markets," delivered to the annual assembly of the Federal Association of German Banks, held in Bonn, Octo- ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 297 her 29, 1980. Excerpts from the address with title, "The Role of the Fund in recycling," in Finance & Development (Washington), 18 (March 1981), pp. 12-13. -. "Universal need for sound adjustment policies emphasized by de Laro- siere at OECD meeting," IMF Survey (Washington), 10 (June 22, 1981), p. 192. Remarks delivered to the ministerial meeting of the Organization for Economic Cooperation and Development, Paris, June 17, 1981. De Saint Phalle, Thibaut. "The Bretton Woods system," "The Operation of the Bretton Woods system," and "Role of the International Monetary Fund," in his Trade, inflation and the dollar (New York and Oxford, Oxford Univer- sity Press, 1981), pp. 106-23, 170-72. de Vries, Margaret G. "Economic shocks of 1970s viewed as signs of profound change in world relationships," IMF Survey (Washington), 9 (January 7, 1980), pp. 1-5. de Vries, Rimmer. "International economic issues and priorities," World Fi- nancial Markets, Morgan Guaranty Trust Company (New York), December 1980, pp. 1-13. Paper submitted to the Congressional Economic Confer- ence, Washington, December 10, 1980. Another version, with title, "Ur- gent tasks on the international scene," published in Challenge (Armonk, New York), 24 (March/April 1981), pp. 42-49. de Vries, Tom. "Free capital movements as a constraining force in international monetary regimes," in Europe and the dollar in the world-wide disequi- librium, J.R. Sargent, ed. (Alphen aan den Rijn, Sijthoff & Noordhoff, 1981), pp. 111-27. Paper originally presented at the eighth colloquium organized by the Societe Universitaire Europeenne de Recherches Fi- nancieres (SUERF), held in Basle, May 1979. . "The International implications of the EMS," in his On the meaning and future of the European Monetary System, Essays in International Finance, No. 138, Princeton University (Princeton, 1980), pp. 39-43. Dean, James W., and Ian H. Giddy. "An Assessment of alternative ways of averting international banking crises," in their Averting international bank- ing crises, Monograph Series in Finance and Economics, 1981-1 (New York, Salomon Brothers Center for the Study of Financial Institutions, Graduate School of Business Administration, New York University, 1981), pp. 35-42. Deane, Marjorie. "Worsening world problems need much better response from IMF," Financier (New York), 4 (April 1980), pp. 17-20. Dell, Sidney. "El Fondo Monetario Internacional y el principio de condi- cionalidad," Revista de la CEPAL (Santiago de Chile), April 1981, pp.149-61. . The International environment for adjustment in developing countries, Working Paper, No. 42, Latin American Program, Woodrow Wilson In- ternational Center for Scholars (Washington, 1979), 19 pp. (Mimeo- graphed) Draft paper prepared for the Workshop on Economic Stabili- zation Programs in Latin America: Political Dimensions, organized by the Center's Latin American Program and held in Washington, June 1979. A revised version of the paper with same title was published in World Devel- opment (Oxford), 8 (November 1980), pp. 833-42. ©International Monetary Fund. Not for Redistribution 298 ANNE C.M. SALDA . On being grandmotherly: the evolution of IMF conditionally, Essays in International Finance, No. 144, Princeton University (Princeton, 1981), 34pp. . "The World monetary order," Third World Quarterly (London), 2 (Oc- tober 1980), pp. 706-20. Carlos Diaz Alejandro, Ricardo Ffrench-Davis, Toma Gudac, and Christian Ossa. Structural adjustment policies; report to the Group of Twenty-Four, United Nations Document UNCTAD/MFD/TA/15 (Geneva? 1981), 17 pp. (Mimeographed) Report prepared under UNDP/UNCTAD Project INT/75/015, Sidney Dell, director of the project. Dell, Sidney, and Roger Lawrence. The Balance of payments adjustment process in developing countries (New York, Pergamon Press, 1980), 155 pp. Pub- lished in collaboration with the United Nations. ."Towards an equitable international adjustment process," Trade and Development; an UNCTAD Review (Geneva), No. 1 (Spring 1979), pp. 53-66. The authors summarize the main features and recommendation of a UNDP/UNCTAD study, which reviews the experience of developing countries during the recent disturbances in the world economy. DeirAccio, Domenico. "Posizione del problema," in his Riforma monetaria; proposte per un nuovo equilibrio economico (Rome, NEMI, 1980), pp. 9^34. Deming, Frederick W. "The Future of the dollar in the world's monetary sys- tem," in Europe and the dollar in the world-wide disequilibrium, J.R. Sargent, ed. (Alphen aan den Rijn, Sijthoff & Noordhoff, 1981), pp. 243-54. Paper originally presented at the eighth colloquium organized by the Societe Universitaire Europeenne de Recherches Financieres (SUERF), held in Basle, May 1979. Diaz-Alejandro, Carlos F. "Southern Cone stabilization plans," in Economic stabilization in developing countries, William R. Cline and Sidney Wein- traub, eds. (Washington, Brookings Institution, 1981), pp. 119-47. Paper presented at a conference organized by the Brookings Institution, held in Washington, October 25-26, 1979. With comments by Ronald McKinnon, and discussion. Dini, Lamberto. "II Sistema monetario internazionale negli anni settanta: re- gime dei tassi di cambio e creazione di liquidita," Moneta e Credito, Banca Nazionale del Lavoro (Rome), 34 (December 1981), pp. 459-71. "Diversification des reserves et echec du Compte de Substitution," "Un DTS progressivement plus attrayant," and "L'Or : illusoire demonetisation," Ramses; rapport annuel mondial sur le systeme economique et les strategies (Paris), 1981, pp. 150-57. Dizard, John. "The Flap over the IMF's market debut," Institutional Investor, International Edition (New York), January 1981, pp. 51-54. Dornbusch, Rudiger. "Statement" and "Prepared statement: U.S. international monetary policies," in Oversight hearings on U.S. international monetary policies; hearings before the Subcommittee on International Trade, In- vestment and Monetary Policy, 97th Congress, 1st Session, November 4 and 5; and December 10,1981, U.S. Congress, House, Committee on Banking, ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 299 Finance and Urban Affairs (Washington, Government Printing Office, 1982), pp. 16-40. Dorrance, Graeme S. "North-South: the need for discussion," Banker (Lon- don), 130 (April/May 1980), pp. 65-70. Discusses the report of the Brandt Commission, including its recommendations concerning the world mone- tary order. Dreyer, Jacob A., and Andrew Schotter. "Power relationships in the Interna- tional Monetary Fund: the consequences of quota changes," Review of Economics and Statistics (Cambridge, Massachusetts), 62 (February 1980), pp. 97-106. Drouin, Michel. Droits de tirage speciaux et developpement economique (Nice? 1977), 318 pp. (Mimeographed) Doctoral thesis, Universite de Nice. Dumont, Rene, and Marie-France Mottin. "Le Fonds monetaire international (FMI) et les finances portent le dernier coup," in their L'Afrique etranglee: Zambie, Tanzanie, Senegal, Cdte-d'Ivoire, Guinee-Bissau, Cap-Vert (Paris, Editions du Seuil, 1980), pp. 67-68. Dunn, Robert M., Jr. "Statement" and "Prepared statement: OPEC surpluses, the international payments problems of developing countries, and the IMF," in To amend the Bretton Woods agreements act to authorize consent to an increase in the United States quota in the International Monetary Fund; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 96th Congress, 2nd Session, on H.R. 5970, February 4, 6, 7; March 20; April 1, 21, 1980, U.S. Congress, House, Committee on Banking, Finance and Urban Affairs (Washington, Government Printing Office, 1980), pp. 289-300. Dunne, Nancy. "IMF-World Bank annual meeting: no small change for IMF," Development Forum, Business Edition (Geneva), No. 64 (October 17, 1980), pp. 1, 18. . "World Bank-IMF annual meeting: compromise rather than battle," Development Forum, Business Edition (Geneva), No. 88 (October 15, 1981), p. 4. Duric-Bijelic, Dragana. "Metiunarodna monetarna saradnja, medunarodni monetarni sistem i razvoj monetarnog suvereniteta," Problemi spoljne Trgovine i Konjunkture (Belgrade), 17, Nos. 3/4 (1978), pp. 57-93. E Earle, John. "Substitution account: can IMF sell the idea?" Times (London), February 26, 1980, p. 17. Economic stabilization in developing countries, William R. Cline and Sidney Weintraub, eds. (Washington, Brookings Institution, 1981), 517 pp. The papers and proceedings of a conference organized by the Brookings Institu- tion, held in Washington, October 25-26, 1979. "The Economy: pleasing the IMF," Economic and Political Weekly (Bombay), 16 (August 1, 1981), p. 1254. ©International Monetary Fund. Not for Redistribution 300 ANNE C.M. SALDA Eder, George Jackson. 'The Gold standard and its paper substitutes," in his What's behind inflation and how to beat it (Englewood Cliffs, New Jersey, Prentice-Hall, 1979), pp. 91-108. Edwards, John. "Coping with the deficit blues," Far Eastern Economic Review (Hong Kong), 109 (July 25, 1980), pp. 48-50. . "The Easy-lending strategy," Far Eastern Economic Review (Hong Kong), 109 (August 8, 1980), p. 46. Describes how the IMF has been looking at ways to give better loan terms to countries with balance of payments problems. -. "The Gulf grows wider," Far Eastern Economic Review (Hong Kong), 110 (October 10,1980), pp. 53-54. Describes how the developed and devel- oping countries failed to reach agreement on key issues at the World Bank- IMF Annual Meetings. Ehrlicher, Werner. "Von Bretton Woods zu einer neuen internationalen Wah- rungsordnung," in Ausgewahlte Probleme international Wirtschaftsbezie- hung aus der Sicht Japans und der Bundesrepublik Deutschland, Theodor Dams and Kunihiro Jojima, eds. (Berlin, Duncker & Humblot, 1980), pp. 102-19. Emminger, Otmar. The International monetary system under stress: what can we learn from the past? Reprint, No. 112, American Enterprise Institute for Public Policy Research (Washington, 1980), 16 pp. The text of an address to a conference on the International Monetary System under Stress, held at the American Enterprise Institute for Public Policy Research, Washington, February 28-29, 1980. French translation with title, "Les Tensions au sein du systeme monetaire international," in Politique Etrangere (Paris), 45 (September 1980), pp. 679-91. . "Internationale Wahrungsentwicklung und Stabilitatspolitik," in Pro- bleme der Wdhrungspolitik, Werner Ehrlicher and Rudolf Richter, eds., Schriften des Vereins fur Socialpolitik, Gesellschaft fur Wirtschafts- und Sozialwissenschaften, N.F., Vol. 120 (Berlin, Duncker & Humblot, 1981), pp. 9-38. Enahoro, Peter. "The IMF in Tanzania," D & C, Development and Cooperation (Bonn), No. 1 (January/February 1980), p. 3. Erasmus, Marthinus Gerhardus. "The International monetary crisis" and "The International Monetary Fund," in his The New international economic order and international organizations (Frankfurt am Main, Haag and Herchen, 1979), pp. 43-46, 188-201. Erb, Richard D. "The IMF and world economic stability," Challenge (Armonk, New York), 24 (September/October 1981), pp. 22-27. . "International resource transfers: the international financial system and foreign aid," in Challenges to a liberal international economic order, Ryan C. Amacher, Gottfried Haberler, and Thomas D. Willett, eds. (Washing- ton, American Enterprise Institute for Public Policy Research, 1979), pp. 383-420. . "Statement," in North-South dialog: progress and prospects; hearings before the Subcommittees on International Economic Policy and Trade and on International Organizations, 96th Congress, 2nd Session, U.S. Congress, ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 301 House, Committee on Foreign Affairs (Washington, Government Printing Office, 1980), pp. 86-103. —. "Statement," in Oversight hearings on U.S. international monetary poli- cies; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 97th Congress, 1st Session, November 4 and 5; and December 10, 1981, U.S. Congress, House, Committee on Banking, Fi- nance and Urban Affairs (Washington, Government Printing Office, 1982), pp. 206-11. -. "The United States and the world economy," AEI Economist, Ameri- can Enterprise Institute for Public Policy Research (Washington), Decem- ber 1980, pp. 1-12. Discusses U.S. policy options for 1981, including inter- national monetary policy. Eros, Gyula. "Some problems of the international monetary system," Acta Oeconomica (Budapest), 26, Nos. 1/2 (1981), pp. 107-22. Esch, J.C.P.A. van. "Ordening van het internationaal betalingsverkeer," in his Internationale economische betrekkingen in hoofdlijnen (Leiden, Stenfert Kroese, 1978), pp. 127-60. Estevez, Jaime. "Transfer of financial resources and the NIEO," in The Fi- nancial issues of the new international economic order, Jorge Lozoya and A.K. Bhattacharya, eds., UNITAR-CEESTEM Library on NIEO (New York, Pergamon Press, 1980), pp. 3-15. "EG-Konsens iiber das IMF-Substitutionskonto; Mindestnormen fur die Ex- portkreditpolitik," Neue Zurcher Zeitung (Zurich), Fernausgabe No. 93 (April 23, 1980), p. 11. Evans, Robert W., and G.H. Makepeace. "The International monetary system" and "Bretton Woods institutions," in their Monetary theory, institutions and practice; an introduction (London, Macmillan, 1979), pp. 191-224. f Fabra, Paul. "Developing nations seek overhaul of IMF and World Bank," Times (London), Europa Supplement (October 7, 1980), p. iv. Discusses some of the moves to change international financial agencies, focusing on the conferences held at Arusha and the document, the "Arusha Initiative." . "Mutations dans la structure financiere apres Bretton-Woods," in Coop- er acion financier a intercontinental en los anos ochenta (Madrid, Institute de Cooperaci6n Intercontinental, 1979), pp. 5-31. With English summary. Essay prepared for the Colloquium on Intercontinental Financial Cooper- ation in the 1980s, organized by the Institute for International Cooperation and held in Madrid, November 5-7, 1979. Farek, Jiff. "Postavene rozvojovych zene v mezinarodnich kapitalovych vztazich," Finance a Uver, ctvrtletne pfiloha (Prague), 30, No. 2 (1980), pp. 131-36; 30, No. 3 (1980), pp. 174-92. With English summary. , and Jan Vrany. "Vyvoz kapitalu z rozvojovych zemi: pficiny, zvlastnosti a problemy," Politicka Ekonomie (Prague), 28, No. 9 (1980), pp. 929-42. With English summary. ©International Monetary Fund. Not for Redistribution 302 ANNE C.M. SALDA Federman, Andres. "IMF: small change for the third world," South; the Third World Magazine (London), No. 2 (November 1980), pp. 5-7. Feiger, George, and Bertrand Jacquillat. "The Bretton Woods system, 1945-1973," "The International Monetary Fund," "Special drawing rights," and "Amended Articles of Agreement of the IMF," in their International finance: text and cases (Boston, Allyn and Bacon, 1982 [i.e., 1981]), pp. 40-58. Fekete, Janos. "Reflections on international monetary policy," New Hungarian Quarterly (Budapest), 22 (Winter 1981), pp. 33-44. Ferrer, Aldo. "La Crisis del sistema monetario internacional: un enfoque es- tructuralista," in his Economia internacional contempordnea: texto para latinoamericanos (Mexico, D.F., Fondo de Cultura Economica, 1976), pp. 63-115. The Financial issues of the new international economic order, Jorge Lozoya and A.K. Bhattacharya, eds., UNITAR-CEESTEM Library on NIEO (New York, Pergamon Press, 1980), 229 pp. "Financing of the LDC deficits" and "Potential problem areas," World Financial Markets, Morgan Guaranty Trust Company (New York), May 1981, pp. 8-11. "Financing the deficits," Economist (London), 274 (January 12, 1980), pp. 66-67. "Finding a substitute for the substitution account," Financial Times World Busi- ness Weekly (London), May 26,1980, pp. 49-50. Suggests that the rejection of the IMF scheme will speed a multicurrency reserve system. Finger, J.M., and D.A. Derosa. "The Compensatory finance facility and export instability," Journal of World Trade Law (Twickenham), 14 (January/ February 1980), pp. 14-22. Fischer, Wolfgang E. "Recycling von Petrodollars: das Problem und einige Losungsansatze unter besonderer Beriicksichtigung der Rolle des Inter- nationalen Wahrungsfonds und der Weltbank," E & Z, Entwicklung und Zusammenarbeit (Bonn), 21 (October 1980), pp. 6-7. Fisher, Douglas. "The International Monetary Fund," in his Money, banking and monetary policy (Homewood, Illinois, Richard D. Irwin, 1980), pp. 442-49. Fitzgerald, Edmund V.K. "Economic policy from 1956 to 1968," "Economic policy from 1969 to 1978," and "Negotiating with foreign capital," in his The Political economy of Peru, 1956-78; economic development and the restructuring of capital (Cambridge and New York, Cambridge University Press, 1979), pp. 222-43. Hint, David. "Some legal implications of fluctuating exchange rates," Australian Law Journal (Sydney), 54 (April 1980), pp. 211-25. Flouzat, Denise. "Evolution du systeme monetaire international," "L'Espace monetaire international," "Le Desordre monetaire international," and "Orientations en vue d'un nouvel ordre monetaire international," in her Economie contemporaine, Vol. 2, Les Phenomenes monetaires (Paris, Presses Universitaires de France, 3rd edition, 1977), pp. 298-482. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 303 "El FMI y el Banco Mundial: recomendaciones para crecer un poco," Comerdo Exterior, Banco Nacional de Comercio Exterior (Mexico, D.F.), 30 (No- vember 1980), pp. 1244-49. Forrest, George. "IMF: do its functions conflict?" Barclays Review (London), 66 (May 1981), pp. 25-26. Francis, David R. "IMF, buffeted over its conditions on loans, bends a bit," Christian Science Monitor (Boston), October 2, 1980, p. 11. . "Third world gains a little in money men's parley," Christian Science Monitor (Boston), September 30, 1980, p. 11. Reports on the IMF-World Bank Annual Meetings in Washington. Frangois, Gabriel. "Problemes monetaires internationaux; realisations euro- peennes et perspectives mondiales," Revue d'Economie Politique (Paris), 90 (November/December 1980), pp. 715-29. Frankfurt International Monetary Conference, Frankfurt am Main, 1977. Do- mestic goals and financial interdependence: the Frankfurt dialogue, Randall Hinshaw, ed. 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Paper presented at a conference organized by the Brookings Institution, held in Washington, October 25-26, 1979. Includes an examination of the relationship between the private banks and the IMF, with case studies of Jamaica, Peru, Turkey, and Zaire. With comments by Robert H. Heller, and discussion. Frowen, Stephen F. "The Interaction between the international monetary sys- tem and financial markets in the 1980's," in Financial markets in the 80's; papers from The Financial Markets Conference, presented by First Austrian Bank, die erste osterreichische Spar-Casse, November 6, 1980, at the Vienna Conference Center (Vienna, First Austrian Bank, 1981?), pp. 7-22. . "Why the IMF is increasing its role in recycling," Euromoney (London), January 1981, pp. 123-32. "The Functioning of the international monetary system, 5 May 1979," in The Brandt Commission papers; selected background papers prepared for the Independent Commission on International Development Issues, 1978-1979 (Geneva and The Hague, Independent Bureau for International Develop- ment Issues, 1981), pp. 601-607. Paper presented to the Independent Com- mission on International Development Issues by Carlos Massad. ©International Monetary Fund. Not for Redistribution 304 ANNE C.M. SALDA "Funny money turning serious?" Economist (London), 275 (April 19, 1980), p. 16. Discusses some possible developments for the SDR, and offers some suggestions for a different name. G Gan, Tjoen Hok. "Asian Finance essay: Pt. 1, International reserve asset: gold, SDR or US$?; Pt. 2, The Free gold market mechanism," Asian Finance (Hong Kong), 7 (November 15, 1981), pp. 53-57; 7 (December 15, 1981), pp. 44-52. Gardner, Richard N. Sterling-dollar diplomacy in current perspective: the origins and the prospects of our international economic order (New York, Columbia University Press, 1980), 423 pp. Reprint of the new, expanded edition published under title, Sterling-dollar diplomacy (New York, McGraw-Hill, 1969); includes a revised introduction. Gehrmann, Dieter. "Substitution account: no solution for international mon- etary problems," Intereconomics (Hamburg), No. 3 (May/June 1980), pp. 112-15. German version with title, "Substitutionskonto: Reformidee ohne Chance," in Wirtschaftsdienst (Hamburg), 60 (May 1980), pp. 231-34. Geisst, Charles R. "Currency considerations," in his Raising international capi- tal; international bond markets and the European institutions (Farnborough, England, Saxon House, 1980), pp. 72-76. Ghatak, Subrata. Monetary economics in developing countries (New York, St. Martin's Press, 1981), 174 pp. Gidlow, R.M. 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"Swallowing the IMF medicine in the 'seventies," Devel- opment Dialogue (Uppsala), No. 2 (1980), pp. 55-74. Examines three case studies of the relationship between the IMF and Jamaica, Peru, and Portugal. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 305 , and Richard Bernal. "The IMF and the third world: the case of Jamaica, 1974-80," Development Dialogue (Uppsala), No. 2 (1980), pp. 113-55. Gisselquist, David. "The International Monetary Fund," "Plans for postwar multinational lending institutions," "Getting money to lend through the IMF and the World Bank," and "The Role of the International Mone- tary Fund," in The Political economics of international bank lending (New York, Praeger, 1981), pp. 26-29, 95-97, 100-101, 196-228. . "Private banks and the International Monetary Fund," in his Oil prices and trade deficits: U.S. conflicts with Japan and West Germany (New York, Praeger, 1979), pp. 119-24. Gleske, Leonhard. 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"The Fund Agreement in the courts—XV-XVII," Staff Papers, Inter- national Monetary Fund (Washington), 27 (September 1980), pp. 601-24; 28 (June 1981), pp. 411-36; 28 (December 1981), pp. 728-59. . "Gold in international monetary law: change, uncertainty and ambigu- ity," Journal of International Law and Economics (Washington), 15 (1981), pp. 323-70. A revised and enlarged version of his "El Cambiante papel del oro in el derecho monetario internacional," Juridica (Mexico, D.F.), 12 (1980), pp. 237-80. ©International Monetary Fund. Not for Redistribution 306 ANNE C.M. SALDA . "Keynes and the Articles of the Fund," Finance & Development (Wash- ington), 18 (September 1981), pp. 38-42. Reviews Volumes XXV and XXVI of The Collected Writings of John Maynard Keynes, Donald Mog- gridge, ed. (London, Macmillan, 1980). . "Keynes on legal problems of international organization," Connecticut Law Review (West Hartford, Connecticut), 14, No. 1 (Fall 1981), pp. 1-21. . The Legal character of the Fund's stand-by arrangements and why it matters, Pamphlet Series, No. 35, International Monetary Fund (Washing- ton, 1980), 53 pp. French translation with title, L'Importance du caractere juridique des accords de confirmation du Fonds, Serie des Brochures, No. 35-F, International Monetary Fund (Washington, 1980), 59 pp.; and Spanish translation with title, La Naturaleza juridica de los acuerdos de derecho de giro del Fondo y su trascendencia, Serie de Folletos, No. 35-S, International Monetary Fund (Washington, 1980), 53 pp. . The Multilateral system of payments: Keynes, convertibility and the Inter- national Monetary Fund's Articles of Agreement, Occasional Paper, No. 6, International Monetary Fund (Washington, 1981), 31 pp. . "The Origins of weighted voting power in the Fund," Finance & Devel- opment (Washington), 18 (March 1981), pp. 25-28. . "Professor Verwey, the International Monetary Fund and developing countries," Indian Journal of International Law (New Delhi), 21 (October/ December 1981), pp. 497-512. Examines some comments by Professor Wil D. Verwey on the law and practice of the International Monetary Fund in his article entitled, "The New international economic order and the realization of the right to development and welfare: a legal survey," in Indian Journal of International Law (New Delhi), 21 (January/March 1981), pp. 1-78. . "The Relationship between the International Monetary Fund and the World Bank," Creighton Law Review (Omaha, Nebraska), 15, No. 2 (1981/1982), pp. 499-521. . The Rule of law in the International Monetary Fund, Pamphlet Series, No. 32, International Monetary Fund (Washington, 1980), 96 pp. French translation with title, La Primaute du droit au Fonds Monetaire Inter- national, Serie des Brochures, No. 32-F, International Monetary Fund (Washington, 1980), 108 pp. . SDRs, currencies, and gold: fifth survey of new legal develop- ments, Pamphlet Series, No. 36, International Monetary Fund (Washington, 1981), 122 pp. . SDRs, currencies, and gold: fourth survey of new legal developments, Pamphlet Series, No. 33, International Monetary Fund (Washington, 1980), 136 pp. French translation with title, DTS, monnaies et or: quatrieme expose sur les changements intervenus dans le domaine juridique, Serie des Brochures, No. 33-F, International Monetary Fund (Washington, 1980), 143 pp.; and Spanish translation with title, Derechos especiales de giro, monedas y oro: cuarta resena y examen de nuevos acontecimientosjuridicos, Serie de Folletos, No. 33-S, International Monetary Fund (Washington, 1980), 149 pp. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 307 . "Substitution in the international monetary system," Case Western Re- serve Journal of International Law (Cleveland, Ohio), 12 (Spring 1980), pp. 265-326. . "Symmetry as a legal objective of the international monetary system," New York University Journal of International Law and Politics (New York), 12 (Winter 1980), pp. 423-77. . "Transformations of the International Monetary Fund," Columbia Jour- nal of International Law (New York), 20, No. 2 (1981), pp. 227-41. The text of an address, delivered at Columbia University, February 23, 1982, when the author was awarded the Silver Medal of the School of International and Public Affairs. Gonzalez Garcia, Leovigildo. Problemdtica monetaria (Asuncion, Comuneros, 1972-76 [i.e., 1976-78]), 3 vols. Goreux, Louis M. 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Includes an examination of devel- oping countries' financing in the 1970s, and the connection between credit from the private multinational banks to the debtor countries and IMF con- ditionally. ."Los Problemas monetarios y financierias internacionales y los paises en desarrollo," Comer do Exterior, Banco Nacional de Comercio Exterior (Mexico, D.F.), 30 (April 1980), pp. 310-15. ©International Monetary Fund. Not for Redistribution 308 ANNE C.M. SALDA Grjebine, Andre. "La Reforme evolutive du systeme monetaire international : 1, Du flottement des monnaies aux changes ajustables; 2, Le DTS, embryon d'une monnaie exclusivement internationale; 3, De 1'assistance financiere aux pays en difficulte a une politique monetaire mondiale," in his La Nou- velle economic internationale; de la crise mondiale au developpement auto- centre (Paris, Presses Universitaires de France, 1980), pp. 232-85. Group of Thirty. 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"Group of 30 sees urgent need for substitution account plan," IMF Survey (Washington), 9 (March 3, 1980), pp. 71-74. Grubel, Herbert G. "Centrally created reserves and the IMF," in his Inter- national economics (Homewood, Illinois, Richard D. Irwin, 1981), pp. 528-60. Gualandri, Elisabetta. "II 'Credito totale interne' e la evoluzione dei controlli creditizi del Fondo Monetario Internazionale, " Studi Economici (Naples), 36, New Series, No. 14 (1981), pp. 31-85. Guindey, Guillaume. Reflections on the international monetary system (Washing- ton, Per Jacobsson Foundation, 1980), 28 pp. Lecture delivered in the Auditorium of the Bank for International Settlements, Basle, June 8,1980. With a commentary by Charles A. Coombs. Guitian, Manuel. "Fund conditionality and the international adjustment pro- cess: Pt. 1, The early period 1950-70; Pt. 2, The changing environment of the 1970s; Pt. 3, A look into the 1980s," Finance & Development (Washing- ton), 17 (December 1980), pp. 23-27; 18 (March 1981), pp. 8-11; 18 (June 1981), pp. 14-17. . Fund conditionality: evolution of principles and practices, Pamphlet Se- ries, No. 38, International Monetary Fund (Washington, 1981), 50 pp. This paper evolved from a series of articles entitled, "Fund conditionality and the international adjustment process," published in Finance & Development (Washington), 17 (December 1980), pp. 23-27; 18 (March 1981), pp. 8-11; 18 (June 1981), pp. 14-17. Guitton, Henri, and Gerard Bramoulle. "Les Accords de Bretton-Woods," "L'Evolution du systeme de Bretton-Woods," and "La Reforme du systeme monetaire international," in their La Monnaie (Paris, Dalloz, 4th edition, 1978), pp. 566-85. ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 309 Gulati, I.S. Cooperative monetary action: a few suggestions for the developing countries, Working Paper, No. 135, Centre for Development Studies (Ulloor, Trivandrum, India), October 1981, 19 pp. (Mimeographed) . "IMF bearer bonds: do they portend much?" Economic and Political Weekly (Bombay), 16 (May 23, 1981), pp. 950-52. . "IMF loan: in deep waters," Economic and Political Weekly (Bombay), 16 (December 19, 1981), pp. 2077-78. -. "New substitution account proposal," Economic and Political Weekly (Bombay), 15 (April 19, 1980), pp. 743-48. Guru, D.D. "International monetary system, second amendment, and devel- oping countries, Pts. 1-2," Economic Affairs (Calcutta), 24 (August/ September 1979), pp. 231-40; 24 (October/December 1979), pp. 273-76. Gurwin, Larry, and Stanley Wilson. "How big a splash will China make?" Institutional Investor, International Edition (New York), September 1980, pp. 173-80. The advantages for China of membership in the IMF and the World Bank are discussed. Guth, Wilfried. "Do the Euromarkets need controlling?" Intereconomics (Ham- burg), No. 2 (March/April 1980), pp. 69-71. Discusses the possibility of closer cooperation between the IMF and the banks in the surveillance of the Euromarkets. -. "Neue Herausforderungen an das internationale Finanzsystem," IFO- Studien (Berlin), 27, Nos. 2/3 (1981), pp. 215-30. H Haberer, Jean-Yves. "Systeme monetaire europeen et systeme monetaire inter- national," Banque (Paris), No. 398 (September 1980), pp. 935-41. Spanish translation with title, "Sistema monetario europeo y sistema monetario internacional," in Revista Bancaria (Mexico, D.F.), 29 (September 1981), pp. 19-27. Haberler, Gottfried. "The Dollar in the world economy: recent developments in perspective," in Contemporary economic problems, 1980, William Fellner, project director (Washington, American Enterprise Institute for Public Pol- icy Research, 1980), pp. 135-65. ."The Experience with managed floating," in Global monetary anarchy; perspectives on restoring stability, Randall Hinshaw, ed. (Beverly Hills and London, Sage Publications, 1981), pp. 107-41. Paper presented at a confer- ence held in Claremont, California, October 1978, under the auspices of the Claremont Graduate School. With discussion. Habermeier, Walter O. "Substitution account plan sought to enhance SDR, help stabilize composition of exchange reserves," IMF Survey (Washington), 9 (February 4, 1980), pp. 33, 42-44. Adapted from the author's article in German entitled, "Das geplante Substitutionskonto des IWF," in Zeitschrift fiir das gesamte Kreditwesen (Frankfurt am Main), 33 (February 1, 1980), pp. 86-88. ©International Monetary Fund. Not for Redistribution 310 ANNE C.M. SALDA Hahn, Hugo J. "Value clauses and international monetary law," German Year- book of International Law (Berlin), 22 (1979), pp. 53-79. Hajek, Karel. "Vyvoz kapitalu a rozvojove zeme," Finance a Uver (Prague), 30, No. 10 (1980), pp. 691-98. Hammer, Langdon. "IMF-Grenada standoff: the elephant and the mouse," U.N. Observer & International Report (New York), 4 (June 1981), p. 14. Hanselmann, Guido. "Die Herausforderung des Petrodollar-Recycling," Neue Zurcher Zeitung (Zurich), Fernausgabe No. 177 (August 3/4, 1980), pp. 9-10. Hansen, Roger D. "The 'structural reform' issue," in his Can the North-South impasse be overcome? Development Paper, No. 27, Overseas Development Council (Washington, 1979), pp. 35-40. Hanson, J.L. 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Includes a discussion of the IMF proposal for adding a food import financing facility to the IMF's compen- satory financing facility. Hayden, Eric W. "Freeing the US dollar from its dominant role," Far Eastern Economic Review (Hong Kong), 108 (April 4, 1980), pp. 48-52. Hayter, Teresa. "Aid," in her The Creation of world poverty (London, Pluto Press in association with Third World First, 1981), pp. 82-96. Heilbroner, Robert L., and Lester C. Thurow. "Defending the dollar," in their Five economic challenges (Englewood Cliffs, New Jersey, Prentice-Hall, 1981), pp. 79-102. Hein, John. "OPEC surpluses, recycling, and the dollar," Bankers Magazine (Boston), 164 (January/February 1981), pp. 86-89. Helleiner, Gerald K. 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"Relief and reform in third world debt," in his International economic disorder: essays in North-South relations (Toronto and Buffalo, University of Toronto Press, 1981), pp. 104-29. A substantially rewritten version of a paper entitled, "Alternative solutions to the debt problems of the devel- oping countries," which was published in LDC external debt and the world economy, Miguel S. Wionczek, ed. (Mexico, D.F., El Colegio de Mexico and Center for Economic and Social Studies of the Third World, 1978), pp. 145-69. Heller, H. Robert. "Further evidence on the relationship between international reserves and world inflation," in Economics and human welfare: essays in honor of Tibor Scitovsky, Michael J. Boskin, ed. (New York, Academic Press, 1979), pp. 233-^8. . "International stabilization policy under flexible exchange rates," in Stabilization policies: lessons from the '70s and implications for the '80s; proceedings of a conference, Working Paper, No. 53, Center for the Study of American Business, Washington University (St. Louis, Missouri, 1980), pp. 258-306. Paper presented at a conference cosponsored by the Center for the Study of American Business and the Federal Reserve Bank of St. Louis, and held in St. Louis, October 29-30, 1979. With discussions by David Laidler and Geoffrey E. Wood. "Statement" and "Prepared statement: International commercial bank lending and the desirability of an IMF quota increase," in To amend the Bretton Woods agreements act to authorize consent to an increase in the United States quota in the International Monetary Fund; hearings before the Subcommittee on International Trade, Investment and Monetary Policy, 96th Congress, 2nd Session, on H.R. 5970, February 4, 6, 7; March 20; April 1, 21, 1980, U.S. Congress, House, Committee on Banking, Finance and Urbaa Affairs (Washington, Government Printing Office, 1980), pp. 544^65. Heywood, John. "The Banks led the way in simplifying the SDR," Euromoney (London), December 1980, pp. 68-72. Hinshaw, Randall. "Background," in Global monetary anarchy; perspectives on restoring stability, Randall Hinshaw, ed. (Beverly Hills and London, Sage Publications, 1981), pp. 13-25. Introduction to the proceedings of a confer- ence held in Claremont, California, October 1978, under the auspices of the Claremont Graduate School. Holbik, Karel. "The Role of development financial institutions," Journal of World Trade Law (Twickenham), 13 (July/August 1979), pp. 322-48. ©International Monetary Fund. Not for Redistribution 312 ANNE C.M. SALDA Hooke, Augustus W. "The Brandt Commission and international monetary issues," Finance &. Development (Washington), 18 (June 1981), pp. 22-24. . The International Monetary Fund: its evolution, organization, and activ- ities, Pamphlet Series, No. 37, International Monetary Fund (Washington, 1981), 81 pp. Hurni, Bettina. "Die Sonderfazilitaten im Internationalen Wahrungsfonds (IWF): Verwendung und Nutzen," Schweizerische Zeitschrift fur Volks- wirtschaft und Statistik (Basle), 117 (March 1981), pp. 55-74. Hiisch, Heinz-Gimther. "Reform of the international monetary system: the position of the Christian Democratic Union," D & C, Development and Cooperation (Bonn), No. 2 (March/April 1981), pp. 9-11. German version with title, "Die Auseinandersetzungen um die Reform des Weltwahrungs- systems und die Haltung der CDU," in E & Z, Entwicklung und Zusam- menarbeit (Bonn), 22 (March 1981), pp. 10-11. Hutchison, Harry D. "The Bretton Woods system of stable, but adjustable, exchange rates, 1945 to 1971" and "Recent history and current problems in international finance," in his Money, banking and the United States econ- omy (Englewood Cliffs, New Jersey, Prentice-Hall, 4th edition, 1980), pp. 561-64, 575-97. I Independent Commission on International Development Issues. North-South: a programme for survival; a report of the Independent Commission on International Development Issues (Cambridge, Massachusetts, MIT Press, 1980), 304 pp. Willy Brandt, chairman of the commission. Ingram, James C. 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"International financial and monetary system and institutions: organization, management and control," in The Brandt Commission papers; selected background papers prepared for the Independent Commission on Interna- tional Development Issues, 1978-1979 (Geneva and The Hague, Indepen- dent Bureau for International Development Issues, 1981), pp. 158-89. Paper prepared for the Independent Commission on International Devel- opment Issues by S.R. Sen. "The International financial system and institutions, 2 February 1979," in The Brandt Commission papers; selected background papers prepared for the ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 313 Independent Commission on International Development Issues, 1978-1979 (Geneva and The Hague, Independent Bureau for International Devel- opment Issues, 1981), pp. 608-34. Paper prepared by the Secretariat for consideration by the Independent Commission on International Devel- opment Issues. The author of the basic concept is Dragoslav Avramovic. "The International financial system and institutions: further considerations, 5 April 1979," in The Brandt Commission papers; selected background papers prepared for the Independent Commission on International Devel- opment Issues, 1978-1979 (Geneva and The Hague, Independent Bureau for International Development Issues, 1981), pp. 635-80. Paper prepared by the Secretariat for consideration by the Independent Commission on International Development Issues. International Monetary Fund. Annual reports of the Executive Board (Washing- ton, 1980-81). Two reports for the financial years ended April 30,1980 and 1981. Also published in French, German, and Spanish. . Annual reports on exchange arrangements and exchange restrictions (Washington, 1980-81). Two reports, 1980 and 1981. . Balance of payments statistics (Washington, 1981). Monthly, with annual Balance of payments statistics, Yearbook, issued in two parts. One volume: Vol. 32, 1981. Continues Balance of payments yearbook, and its supple- ment, World summary of international transactions. . Balance of payments yearbook (Washington, 1980). One volume: Vol. 31, 1980. Issued in loose-leaf form and in a bound volume. Beginning in 1981, with Vol. 32, 1981, this publication is continued by monthly issues, entitled Balance of payments statistics, and by a two-part yearbook, entitled Balance of payments statistics, Yearbook. . By-laws, rules and regulations (Washington, 1981). Two issues: 37th, January 1, 1981; and 38th, July 1, 1981. Also published in French and Spanish. . Direction of trade (Washington, 1980). Monthly, and, for 1980, Direc- tion of trade yearbook, 197311979. Continued by Direction of trade statistics, and by Direction of trade statistics, Yearbook. . Direction of trade statistics (Washington, 1981). Monthly; with, for 1981, Direction of trade statistics, Yearbook, 197411980. Continues Direction of trade (Washington, 1964-80). . External indebtedness of developing countries, by a staff team headed by Bahram Nowzad and Richard C. Williams, Occasional Paper, No. 3 (Wash- ington, 1981), 51 pp. . Finance & Development (Washington, 1980-81). Quarterly. Two vol- umes: Vol. 17, 1980; and Vol. 18, 1981. Published jointly with the Interna- tional Bank for Reconstruction and Development. Also published in French with title, Finances et developpement; in Spanish with title, Finanzas y desarrollo; in German with title, Finanzierung und Entwicklung (Hamburg, HWWA-Institut fur Wirtschaftsforschung); and in Arabic. The Portuguese edition, with title Finangas e desenvolvimento (Rio de Janeiro, Centre de Informacoes das Nagoes Unidas), was published as an annual issue of selected articles through 1980; beginning in 1981 issued quarterly. ©International Monetary Fund. Not for Redistribution 314 ANNE C.M. SALDA -. Government finance statistics yearbooks (Washington, 1980-81). Two volumes: Volvoi. :>3,, 1980i^ou;; anda Volvol. 4, ivoi1981. . International capital markets: recent developments and short-term pros- pects, by a staff team headed by R.C. Williams, Occasional Paper, No. 1 (Washington, 1980), 61 pp. International capital markets: recent developments and short-term pros- pects, 1981, by a staff team headed by Richard C. Williams, with G.G. Johnson, Occasional Paper, No. 7 (Washington, 1981), 85 pp. . International financial statistics (Washington, 1980-81). Monthly. Two volumes: Vol. 33,1980; and Vol. 34,1981; and annual supplement, Interna- tional financial statistics yearbook, two volumes: 1980 and 1981. Also pub- lished in French and Spanish. Beginning 1981, a supplement series to International Financial Statistics (in English only) began publication. Two issues: No. 1, Supplement on exchange rates; No. 2, Supplement on price statistics. —. IMF Survey (Washington, 1980-81). Semimonthly. Two volumes: Vol. 9,1980; and Vol. 10,1981. Also published in French with title, Bulletin du FMI; and in Spanish with title, Boletin del FML —. Selected decisions of the International Monetary Fund and selected docu- ments, 9th issue, June 15, 1981 (Washington, 1981), 413 pp. Includes those decisions published in the 8th issue (1976) and the Supplement to that issue (1978), as well as new decisions adopted after the publication of the Supple- ment. Also published in French and Spanish. —. Les Services d'assistance technique du Fonds Monetaire International, Serie des Brochures, No. 30-F, International Monetary Fund (Washington, 1979), 26 pp., and Servicios de asistencia tecnica del Fondo Monetario Inter- nacional, Serie de Folletos, No. 30-S, International Monetary Fund (Wash- ington, 1979), 27 pp. French and Spanish translations of Technical assistance services of the International Monetary Fund, Pamphlet Series, No. 30 (Wash- ington, 1979), 25 pp. —. Staff Papers (Washington, 1980-81). Four numbers per annual volume. Two volumes: Vol. 27, 1980; and Vol. 28, 1981. —. Summary proceedings of the annual meetings of the Board of Governors (Washington, 1980-81). Two proceedings: 35th, 1980; and 36th, 1981. —. "Supplement on the Fund," IMF Survey (Washington), 9 (September 1980), pp. 1-16; 10 (September 1981), pp. 1-16. —. World economic outlook: a survey by the staff of the International Mone- tary Fund (Washington, 1980-81). Two issues: 1980 and 1981. The issue for 1981 was published as Occasional Paper, No. 4. -. World summary of international transactions (Washington, 1980). One issue: 1973-79, December 1980. Issued as supplement to Balance of pay- ments yearbopk, Vol. 31 (Washington, 1980). Continued in Balance of pay- ments statistics, Yearbook, Part 2. International Monetary Fund, Board of Governors, Committee on Reform of the International Monetary System. Riforma del sistema monetario inter - nazionale, Collana Internazionale di Saggi Monetari, Creditizi e Bancari, ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 315 No. 35 (Milan, Cassa di Risparmio delle Provincie Lombarde, 1977), 352pp. Italian translation of its International monetary reform; documents of the Committee of Twenty (Washington, International Monetary Fund, 1974), 253 pp. The Italian version also includes an introductory essay by Francesco Arcucci. International Monetary Fund, Bureau of Language Services. IMF glossary, English-French-Spanish (Washington, revised edition, 1980), 162 pp. International Monetary Fund, Fiscal Library. A Selected bibliography on budget- ing and expenditure control (Washington, 1980), 89 pp. International Monetary Fund, IMF Institute. 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"The IMF loan," Pakistan Economist (Karachi), 20 (December 6, 1980), pp. 5-6. "IMF loan: only half needed?" Economic and Political Weekly (Bombay), 16 (December 5, 1981), pp. 1970-71. "IMF loans have bankers fretting," Business Week (New York), No. 2698 (July 27, 1981), p. 70. Suggests that some bankers fear that IMF condi- tionally is weakening. "The IMF looks east for a money source," Business Week (New York), No. 2677 (March 2, 1981), pp. 26-28. "The IMF may borrow millions," Business Week (New York), No. 2650 (August 18, 1980), pp. 23-24. Discusses the possible entry of the IMF into world financial markets as a borrower. "IMF; not a good week for inspiration," Economist (London), 275 (May 3, 1980), p. 82. "The IMF opens its arms, and its purse, to Jamaica," Financial Times World Business Weekly (London), November 24, 1980, pp. 49-50. "IMF picks Gabon for African debut," West Africa (London), No. 3331 (June 1, 1981), pp. 1215-19. ©International Monetary Fund. Not for Redistribution 316 ANNE C.M. SALDA "The IMF reconsiders a recycling role," Financial Times World Business Weekly (London), April 7, 1980, p. 50. "IMF should not act like an aid agency," Journal of Commerce (New York), April 6, 1981, p. 6. Comments on an address by Henry C. Wallich to the International Conference on the Financial Development of Latin America in Caracas, April 4, 1981. "The IMF; the LDCs' gripes get louder," Financial Times World Business Week- ly (London), August 11, 1980, pp. 51-52. "IMF: the permissive daddy," Journal of Commerce (New York), October 23, 1980, p. 4. "International Monetary Fund: the road from Bretton Woods," Economist (London), 276 (September 27, 1980), pp. 111-18. "The IMF: the third world's man at the Fund," Financial Times World Business Weekly (London), June 8, 1981, p. 51. Discusses the election of Canada's Allan MacEachen as chairman of the IMF's Interim Committee. 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Paper origi- nally presented at the Oxford International Symposium held at Christ Church, Oxford, September 1978. With a comment by A. Boltho. "Die Konferenz von Libreville: das Interimskomitee in Wartestellung; harziger Dialog zwischen Nord und Sud," Neue Zurcher Zeitung (Zurich), Fern- ausgabe No. 117 (May 23, 1981), pp. 13-14. Konrad, Anton. "Internationaler Wahrungsfonds: eine neue Phase des Recycling?" Wirtschaftsdienst (Hamburg), 60 (July 1980), pp. 327-31. L Lactevic, Borcte. "Godisnje zasedanje bretonvudskih ustanova u 1978," Mefiunarodni Problemi (Belgrade), 31, No. 1 (1979), pp. 95-114. Laight, J.C. "Paper gold," South African Banker (Johannesburg), 78 (February 1981), pp. 22-24. Laishley, Roy. "Tanzania versus the IMF," African Business (London), No. 37 (September 1981), p. 53. Lai, Deepak. 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"Commercial transactions in SDRs; some documen- tation considerations," Business Law Review (London), 2 (October 1981), pp. 351-17. Y Yeager, Leland B., and associates. "Some Latin American experiences since World War II," in their Experiences with stopping inflation (Washington and London, American Enterprise Institute for Public Policy Research, 1981), pp. 108-40. Includes a discussion of IMF stabilization programs in Bolivia, Paraguay, and Argentina. z Zamora, S. "Voting in international economic organizations," American Jour- nal of International Law (Washington), 74 (July 1980), pp. 566-608. Zehetner, Franz. "Geldwertsicherung in 'real terms'," Osterreichisches Bank- Archiv (Vienna), 29 (November 1981), pp. 384-400. . "IWF vereinfacht die Wertdefinition der Sonderziehungsrechte," Osterreichisches Bank-Archiv (Vienna), 28 (November 1980), pp. 406-10. Zelko, Lajos. "The Present capitalist international monetary system" and "Cri- teria of international money: the problem of flexibility," in his Interna- tional value, international prices (Alphen aan den Rijn, Sijthoff & Noordhoff; Budapest, Akademiai Kiado, 1980), pp. 73-84, 90-91. Zenoff, David B., and Geoffrey S. Howard. "LDC debt: is the sky going to fall?" Sloan Management Review (Cambridge, Massachusetts), 22 (Fall 1980), pp. 55-62. Zijlstra, Jelle. Central banking with the benefit of hindsight (Washington, Per Jacobsson Foundation, 1981), 34 pp. Lecture delivered at the International Monetary Fund, Washington, September 27, 1981. With a commentary by Albert Adomakoh. French translation with title, Banques centrales: les ©International Monetary Fund. Not for Redistribution IMF: A SELECTED BIBLIOGRAPHY 351 enseignements de I'experience (Washington, Per Jacobsson Foundation, 1981), 39 pp.; and Spanish translation with title, Bancos centrales: las ven- tajas de una vision retrospectiva (Washington, Per Jacobsson Foundation, 1981), 38 pp. Zolotas, Xenophon. "The Case for an international loan insurance fund," Banker (London), 130 (November 1980), pp. 33-36. . On the issue of a stable international monetary standard, and other papers, Papers and Lectures, No. 46, Bank of Greece (Athens, 1981), 45 pp. Zwass, Adam. "The First Soviet statement on the IMF," Euromoney (London), January 1980, pp. 102,105. ©International Monetary Fund. Not for Redistribution SUMMARIES Inflationary Expectations, Taxes, and the Demand for Money in the United Statesr—VITO TANZI (pages 155-70) This paper deals with a theoretical issue that also has some practical relevance. The issue is whether the demand for money in a country such as the United States is affected only by the rate of interest, as is normally argued, or whether it is affected by both the rate of interest and inflationary expectations. The paper argues that in the absence of taxes on income and of institutional constraints on the level of interest rates, only interest rates would be relevant, as the rate of interest would generally exceed the rate of inflationary ex- pectations and would thus be the relevant opportunity cost of holding money. However, when, in the presence of inflation, interest rates are constrained, as they are in developing countries, and/or when interest incomes are taxed, then it is possible that inflationary expectations, rather than the rate of interest, become the main variable influencing the demand for money. The paper emphasizes that in the United States, the net-of-tax rate of return on financial assets was often lower than the rate of expected inflation (this situation has obviously changed recently). Therefore, it became convenient for people to get out of money and financial assets and into real goods (gold, houses, etc.). The paper tests the hypothesis that inflationary expectations, rather than the rate of interest, were the major determinant of the demand for money in the United States during 1964-78. The empirical tests validate this hypothesis. Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experience of the Seventies—DONAL J. DONOVAN (pages 171-203) The paper investigates selected aspects of the macroeconomic performance of countries that undertook upper credit tranche stand-by arrangements during 1971-80, in terms of changes in their balance of payments position, inflation, economic growth, savings, investment, and real consumption. The analysis uses both "short-run" (one-year) and "long-run" (three-year) comparison periods before and after the adoption of the program and also takes into account aggre- gative changes in the macroeconomic variables in question for all non-oil devel- oping countries during corresponding time periods. The main empirical findings from the aggregative results are as follows: (i) program countries generally exhibited a significant balance of payments improvement in both absolute terms and relative to all non-oil developing coun- tries; (ii) less progress was achieved in actually reducing inflation rates, but inflation tended to rise by less than it did in all non-oil developing countries; (iii) although there was some tendency for investment ratios to fall slightly, economic growth rates were not significantly altered on average, thereby im- plying some increase in the productivity of investment; (iv) while reductions in 352 ©International Monetary Fund. Not for Redistribution SUMMARIES 353 the current account deficit partly reflected a rise, on average, in the domestic savings rate, since real economic growth was relatively unaffected, the rate of real consumption growth remained positive (on average, about 4 per cent per annum). Thus, on the basis of these highly aggregative results, it appears that program countries succeeded in achieving a significant degree of external adjustment, while the associated costs (in terms of forgone output and real consumption) appear, on average, to have been less severe than has sometimes been suggested by participants in the discussion of Fund conditionality. Effects of Inflation Control Programs on Expected Real Interest Rates— JOHN H. MAKIN (pages 204-32) The three major findings of this paper are the following: (1) Programs of monetary restraint tend to result in higher real interest rates because when they are initially implemented, they result in surprise monetary stringency. The magnitude of negative money surprises in the second quarter of 1981 is estimated to have added two to three percentage points to both real and nominal interest rates. (2) An increase in the fiscal deficit can raise the real rate if it raises the ratio of total borrowing to gross national product (GNP), but the usual effect of a larger ratio of the budget deficit to GNP is to lower the real rate. This apparent paradox is caused by the fact that the ratio of total borrowing to GNP typically moves inversely with respect to the ratio of the budget deficit to GNP, since deficits often increase during recessions when total demand on credit markets is weak. (3) The equation estimated to explain interest rate behavior consistently underpredicts interest rates in 1981. This suggests not only that some change in underlying structural relationships may have taken place but also that special circumstances, such as the new tax incentives for U.S. business and large projected federal budget deficits in the United States, may have had some effects on interest rates. An Analysis of Exchange Market Intervention of Industrial and Developing Countries—MICHAEL DOOLEY (pages 233-69) A simple model is presented that clarifies the conditions under which inter- vention policy, defined as management of the currency composition of non- monetary debt, can be effective in influencing exchange rates. When defined in this way, intervention includes any government transaction, or set of transactions, that changes the relative supplies of official nonmonetary debt denominated in different currencies held by the private sector. This defini- tion of intervention permits a clear distinction to be drawn between monetary policy and exchange market intervention policy. It is assumed that a government makes two decisions concerning its financial balance sheet—first, what part of its debt takes the form of base money (monetary policy), and, second, in what currency the balance of its nonmonetary debt is denominated (intervention policy). These definitions of monetary and intervention policies do not depend ©International Monetary Fund. Not for Redistribution 354 INTERNATIONAL MONETARY FUND STAFF PAPERS upon the intent of the government involved, the exchange rate regime (i.e., fixed or floating), or the particular mechanisms employed to alter the government's balance sheet. Estimates of exchange market intervention activity are presented for a large number of industrial and developing countries. They show that intervention policies of major industrial countries have since 1973 generated only minor changes in the relative supplies of nonmonetary assets denominated in the cur- rencies of industrial countries. This might account for the widely held view that intervention policies of the major industrial countries have not been a powerful force in exchange markets since 1973. However, the actions of developing coun- tries and smaller industrial countries have generated large changes in the relative supplies of nonmonetary debt denominated in the currencies of industrial coun- tries. It is suggested that failure of existing empirical work to establish a link between intervention policies of industrial countries and exchange rates among their currencies might be due to the failure to model the effects of third country intervention policies. Interest Rate Differentials and Exchange Risk: Recent Argentine Experience— MARIO I. BLEJER (pages 270-79) The relationship between international interest rate differentials and changes in exchange rates has been studied extensively for the major currencies. For such currencies, interest parity generally holds, after allowance has been made for transactions costs, political and sovereign risks, exchange controls, and different taxation practices. If there is no forward market for a currency, the interest rate differential would tend to equal the expected change in the exchange rate, after allowing for the factors mentioned above, but will also include a risk premium to compensate for the existence of exchange risk. This paper considers the Argentine experience after its financial market was liberalized. It shows that for the period June 1977-August 1981, observed inter- est rate differentials, adjusted for exchange rate changes, do not display any pattern of serial correlation, and therefore behave as forecast errors in an effi- cient market. A rational interpretation of this result is that, although domestic and foreign assets are not likely to be perfect substitutes, the Argentine financial market is informationally efficient and has been characterized by an uncor- related, time-varying risk premium on domestic assets. In other words, the liberalization process in Argentina has been instrumental in promoting efficiency in the domestic financial market. Argentina, like more industrialized countries, has offered interest rates that have been tied to world market levels by, in general, accurately anticipating—and providing compensation for—expected depreciations of the peso against the U.S. dollar. ©International Monetary Fund. Not for Redistribution RESUMES Anticipations inflationnistes, impots et demande de monnaie aux Etats-Unis — VITO TANZI (pages 155-70) L'auteur de la presente etude cherche a determiner si la demande de monnaie dans un pays comme les Etats-Unis est uniquement influencee par les taux d'interet, comme on le fait generalement valoir, ou si elle est influencee a la fois par les taux d'interet et par les anticipations inflationnistes. Pour ce faire, il examine la question sous un angle a la fois theorique et empirique. L'auteur fait valoir que lorsque les revenus sous forme d'interets ne sont pas imposes et qu'aucune contrainte d'ordre institutionnel n'est exercee sur le niveau des taux d'interet, seuls les taux d'interet agissent sur la demande de monnaie, car ils sont generalement superieurs au taux d'inflation attendu et correspondent done au cout d'opportunite, implique par la detention de monnaie. Toutefois, lorsqu'en periode d'inflation, les autorites empechent les taux d'interet de mon- ter, comme c'est le cas dans les pays en developpement, ou lorsque les revenus sous forme d'interets sont assujettis a 1'impot, ou encore si ces deux situations existent simultanement, il est possible que les anticipations inflationnistes sup- plantent les taux d'interet en tant que principale variable qui influence la de- mande de monnaie. L'auteur de 1'etude souligne qu'aux Etats-Unis, le taux de rendement net des avoirs financiers a souvent ete inferieur au taux d'inflation attendu (il va de soi qu'un renversement de la situation s'est produit ces derniers temps). Les gens ont done juge avantageux de se debarrasser de leurs avoirs en monnaie et de leurs avoirs financiers pour acquerir des biens reels (or, maisons, etc.). Dans le cadre de 1'etude, 1'auteur effectue des tests pour verifier 1'hypothese selon la- quelle ce sont les anticipations inflationnistes et non pas les taux d'interet qui ont ete le facteur determinant de la demande de monnaie aux Etats-Unis entre 1964 et 1978. Les resultats des tests empiriques corroborent cette hypothese. Resultats macroeconomiques et ajustement dans le cadre de programmes beneficiant de Faide du FMI : les enseignements des annees 70 — DONAL J. DONOVAN (pages 171-203) La presente etude porte sur certains aspects des resultats macroeconomiques des pays qui ont entrepris, entre 1971 et 1980, 1'application de programmes d'ajustement dans le cadre d'accords de confirmation dans les tranches supe- rieures de credit. Ces resultats correspondent aux changements intervenus en matiere de balance des paiements, d'inflation, de croissance economique, d'epargne, d'investissement et de consommation reelle. II s'agit d'une analyse comparative dans le court terme (1 an) et dans le long terme (3 ans), avant et apres 1'adoption du programme. En outre, cette analyse tient compte des varia- tions globales des variables macroeconomiques considerees pour 1'ensemble des 355 ©International Monetary Fund. Not for Redistribution 356 INTERNATIONAL MONETARY FUND STAFF PAPERS pays en developpement non petroliers pendant les periodes correspondantes. Les principales conclusions empiriques que Ton peut tirer des resultats glo- baux sont exposees ci-dessous : i) en general, les pays qui ont applique un programme d'ajustement sont parvenus a ameliorer sensiblement la position de leur balance des paiements, tant en termes absolus que par rapport a 1'ensemble des pays en developpement non petroliers; ii) les pays ont obtenu des resultats plus modestes en ce qui concerne la reduction effective des taux d'inflation, mais ils ont generalement connu une inflation moins rapide que 1'ensemble des pays en developpement non petroliers; iii) malgre une legere tendance a la baisse des taux d'investissement, le taux de croissance economique de ces pays est reste en moyenne relativement stationnaire, ce qui suppose un leger accroissement de la product!vite de 1'investissement; iv) certes, la diminution du deficit des ope- rations courantes refletait, en partie, une hausse du niveau moyen de 1'epargne interieure. Mais, comme la croissance economique reelle n'avait guere subi de changements, le taux de croissance de la consommation reelle est reste positif (pres de 4 % par an en moyenne). II ressort de resultats globaux que les pays concernes par les programmes ont accompli des progres considerables en matiere d'ajustement exterieur, et que les couts y afferents (pertes au niveau de la production et de la consommation reelle) ont ete, en moyenne, moins eleves que ne le croyaient certains par- ticipants aux discussions sur la conditionnalite de 1'aide accordee par le Fonds. Effets exerces par les programmes de lutte centre rinflation sur les taux d'interet reels prevus — JOHN H. MAKIN (pages 204-32) Les trois principales constatations faites dans cette etude sont les suivantes : 1) Les programmes d'austerite monetaire se traduisent en general par une hausse des taux d'interet reels parce qu'au debut de leur application ils pro- voquent un resserrement monetaire inattendu. On estime que les surprises mo- netaires negatives au deuxieme trimestre de 1981 ont ete d'une telle ampleur qu'elles ont ajoute deux a trois points de pourcentage aux taux d'interet reels et nominaux. 2) Une augmentation du deficit des finances publiques peut relever le taux reel si elle accroit le ratio emprunts globaux/produit national brut (PNB), mais un ratio deficit budgetaire/PNB plus eleve a generalement pour effet d'abaisser le taux reel. Ce paradoxe apparent vient de ce que le ratio emprunts globaux/PNB evolue normalement en sens inverse du ratio deficit budgetaire/PNB, puisque les deficits augmentent souvent en periode de recession, quand la demande totale sur les marches du credit est faible. 3) L'equation estimee pour expliquer le comportement des taux d'interet prevoit regulierement des taux d'interet inferieurs aux taux observes en 1981. Cela donne a penser non seulement que les rapports structured fondamentaux ont peut-etre subi quelques changements, mais, aussi, que des circonstances speciales, telles que les nouvelles mesures fiscales prises en faveur des en- treprises americaines et les deficits massifs du budget federal projetes aux Etats- Unis, ont peut-etre exerce des effets sur les taux d'interet. ©International Monetary Fund. Not for Redistribution RESUMES 357 Analyse des politiques d'intervention sur le marche des changes, adoptees par les pays industrialises et les pays en developpement — MICHAEL DOOLEY (pages 233-69) L'auteur decrit un modele simple precisant les conditions dans lesquelles la politique d'intervention, definie comme une action sur la composition en mon- naies de la dette non monetaire, peut reellement influer sur les taux de change. Selon cette definition, il y a intervention des lors que 1'Etat effectue une ou plusieurs transactions qui ont pour effet de modifier I'offre relative d'instruments de la dette officielle non monetaire, libelles en diverses monnaies et detenus par le secteur prive. Cette definition de 1'intervention permet d'etablir une dis- tinction tres nette entre la politique monetaire et la politique d'intervention sur le marche des changes. L'analyse part de 1'hypothese qu'en matiere de bilan financier les decisions des autorites portent sur deux points : en premier lieu, le pourcentage de la dette qui doit faire partie de la base monetaire (politique monetaire) et, en second lieu, la monnaie en laquelle sera libelle le solde de la dette non monetaire (politique d'intervention). Ces definitions de la politique monetaire et de la politique d'intervention ne sont fonction ni de 1'intention des autorites, ni du regime de change (taux fixe ou taux flottant), ni des mecanismes specifiques qui permettent de modifier le bilan de 1'Etat. Les estimations relatives aux interventions sur le marche des changes se rap- portent a un grand nombre de pays industrialises et de pays en developpement. Elles font ressortir que la politique d'intervention des grands pays industrialises n'a guere modifie, depuis 1973, I'offre relative d'avoirs non monetaires libelles en monnaies des pays industrialises. C'est peut-etre pour cette raison que, selon une opinion tres repandue, les politiques d'intervention des grands pays indus- trialises n'auraient pas joue un role preponderant sur les marches des changes pendant la periode qui remonte a cette annee-la. En revanche, 1'intervention des pays en developpement et des petits pays industrialises a eu de profondes reper- cussions sur I'offre relative d'instruments de la dette non monetaire, libelles en monnaies des pays industrialises. Si les travaux empiriques effectues jusqu'a present ne sont pas parvenus a relier les politiques d'intervention des pays industrialises et les taux de change entre les monnaies de ces pays, c'est peut-etre parce que les modeles omettent de faire intervenir 1'incidence des politiques d'intervention des pays tiers. Differentiels de taux d'interet et risque de change: le cas de 1'Argentine — MARIO I. BLEJER (pages 270-79) La relation entre les differentiels de taux d'interet internationaux et 1'evolution des taux de change a fait 1'objet d'examens approfondis dans le cas des grandes monnaies. Pour ces monnaies, la these de la parite d'interet est generalement valable, lorsque sont pris en compte les couts de transaction, les risques politiques et de souverainete, les mesures de controle des changes et les differentes dispositions adoptees en matiere de taxation. S'il n'y a pas de marche a terme pour une monnaie donnee, le differentiel de taux d'interet est habi- tuellement egal a la variation attendue du taux de change, compte tenu des ©International Monetary Fund. Not for Redistribution 358 INTERNATIONAL MONETARY FUND STAFF PAPERS facteurs susmentionnes, mais il comprend, en outre, une prime de risque qui contrebalance 1'existence du risque de change. L'auteur de la presente analyse examine ce qui s'est passe en Argentine a la suite de la liberalisation du marche financier. II y montre que, pour la periode juin 1977-aout 1981, les differentiels de taux d'interet observes et ajustes en fonction de 1'evolution du taux de change ne revelent aucune structure de cor- relation en serie, et se comportent done comme des erreurs de prevision dans un marche efficace. Par consequent—et cette interpretation est rationnelle —, meme si la substitution qui s'opere entre les actifs interieurs et les actifs etrangers n'est probablement pas parfaite, le marche financier de 1'Argentine est un marche efficace sur le plan de reformation et se caracterise par le fait que les actifs interieurs y sont assortis d'une prime non correlee et variable dans le temps. En d'autres termes, le processus de liberalisation opere par 1'Argentine aurait, dans une certaine mesure, favorise 1'efficacite du marche financier inte- rieur. A 1'instar d'autres pays plus industrialises, 1'Argentine a offert des taux d'interet qui ont evolue en liaison assez etroite avec ceux des marches mondiaux, du fait de 1'anticipation en general exacte — et compensee—des depreciations attendues du peso par rapport au dollar E.U. ©International Monetary Fund. Not for Redistribution RESUMENES Expectativas inflation arias, impuestos y la demanda de dinero en Estados Unidos—VITO TANZI (paginas 155-70) Este trabajo se refiere a un tema teorico que tambien tiene cierta importancia practica. La cuestion es determinar si la demanda de dinero en un pais como Estados Unidos se ve afectada unicamente por el tipo de interes, tal como se sostiene generalmente, o si se ve afectada por el tipo de interes y tambien por las expectativas inflacionarias. En este trabajo se afirma que, cuando no existen impuestos sobre la renta ni limitaciones institucionales al nivel de los tipos de interes, solo estos serfan pertinentes, dado que el tipo de interes en general sobrepasaria la tasa de las expectativas inflacionarias y, por consiguiente, seria el costo de oportunidad pertinente de mantener dinero. No obstante, cuando, habiendo inflation, se limitan los tipos de interes, como sucede en los paises en desarrollo, o cuando se gravan los ingresos por intereses, entonces es posible que las expectativas inflacionarias, y no el tipo de interes, se conviertan en la principal variable que influye en la demanda de dinero. Se destaca en este trabajo que en Estados Unidos la tasa de rentabilidad de los activos financieros, una vez deducidos los impuestos, a menudo fue mas baja que la tasa de la inflation prevista (esta situation obviamente ha variado en los ultimos tiempos). Por lo tanto, al piiblico le resulto conveniente abandonar los activos financieros y monetarios y sustituirlos por bienes reales (oro, casas, etc.). En este estudio se prueba la hipotesis de que las expectativas inflacionarias, y no el tipo de interes, constituyeron el principal factor determinante de la demanda de dinero en Estados Unidos en el periodo 1964-78. Las pruebas empiricas dan validez a esta hipotesis. Resultados macroeconomicos y ajuste obtenidos con programas respaldados por recursos del Fondo: La experiencia de los aiios setenta—DONAL J. DONOVAN (paginas 171-203) En este estudio se investigan ciertos aspectos de los resultados macro- economicos obtenidos por los paises con acuerdos de derecho de giro en los tramos superiores de credito durante el periodo 1971-80, en lo que se refiere a variaciones de la position de balanza de pagos, inflation, crecimiento eco- nomico, ahorro, inversion y consumo real. En el analisis se comparan periodos "a corto plazo" (un ario) y "a largo plazo" (tres anos) antes y despues de la adoption del programa, teniendose tambien en cuenta la variation acumulativa de las mismas variables macroeconomicas para el conjunto de paises en des- arrollo no petroleros durante esos mismos periodos. Las principales conclusiones empiricas derivadas de los resultados globales son las siguientes: i) la balanza de pagos de los paises que emprendieron pro- 359 ©International Monetary Fund. Not for Redistribution 360 INTERNATIONAL MONETARY FUND STAFF PAPERS gramas presento generalmente una me j or a significativa en terminos absolutes y en relation con todos los paises en desarrollo no petroleros; ii) se logro menor progreso en cuanto a reducir las tasas de inflation, pero la inflation tendio a aumentar menos que en todos los paises en desarrollo no petroleros; iii) aunque la razon inversion/PNB tendio mas bien a bajar las tasas de crecimiento eco- nomico no variaron en promedio significativamente, lo cual supone cierto in- cremento de la productividad de la inversion; iv) aunque la reduction del deficit en balanza corriente reflejo en parte un aumento, en promedio, de la tasa de ahorro interno, como el crecimiento economico real no se vio relativamente afectado, la tasa de aumento del consumo real continue siendo positiva (en promedio, alrededor del 4 por ciento por ano). En consecuencia, sobre la base de estos resultados, de caracter muy agregado, cabe suponer que los paises que emprendieron programas consiguieron un grado significativo de ajuste externo, y que el costo conexo (en terminos de producto y de consumo real a los que se renuncia) no parece haber sido, en promedio, tan gravoso como se ha insinuado a veces al examinarse en diversos foros la condi- cionalidad de los recursos del Fondo. Efectos de los programas de control de la inflation en los tipos de interes reales previstos—JOHN H. MAKIN (paginas 204-32) Las tres conclusiones principals de este trabajo son las siguientes: 1) Los programas de restriction monetaria en general dan como resultado tipos de interes reales mas elevados porque, cuando se inicia su aplicacion, producen una escasez monetaria por sorpresa. Se calcula que debido a la mag- nitud de las sorpresas monetarias negativas del segundo trimestre de 1981 los tipos de interes reales y nominates aumentaron de dos a tres puntos porcentuales. 2) Un aumento del deficit presupuestario puede hacer subir el tipo real si eleva la razon entre el total de emprestitos y el producto nacional bruto (PNB), pero el efecto que suele tener una razon mas alta entre el deficit presupuestario y el PNB consiste en una baja del tipo real. Esta aparente par ado j a es provocada por el hecho de que la razon entre el total de emprestitos y el PNB normalmente varia en sentido inverso de la razon entre el deficit presupuestario y el PNB, dado que los deficit suelen aumentar durante las recesiones, en que hay menos demanda total en los mercados de credito. 3) La ecuacion calculada para explicar el comportamiento de los tipos de interes predice sistematicamente tipos mas bajos que los tipos efectivos de 1981. Esto indica no solo que pueden haberse producido algunas variaciones en las relaciones estructurales basicas sino tambien que algunas circunstancias es- peciales, como por ejemplo los nuevos incentives tributaries para las empresas de Estados Unidos y los grandes deficit del presupuesto federal previstos en ese pais, pueden haber repercutido en los tipos de interes. Analisis de la intervention de los paises industrials y en desarrollo en los mercados de divisas—MICHAEL DOOLEY (paginas 233-69) Se presenta un modelo sencillo que permite establecer con claridad las condi- ciones en que una politica de intervention, definida como el control de la ©International Monetary Fund. Not for Redistribution RESUMENES 361 composition de monedas de la deuda no monetaria, puede influir en los tipos de cambio. Definida de este modo, la intervention incluye cualquier transaction o con- junto de transacciones del gobierno que modifiquen la composition relativa de la deuda no monetaria oficial denominada en diferentes monedas en poder del sector privado. Esta definition de intervention permite establecer una distincion precisa entre politica monetaria y politica de intervention en el mercado de divisas. Se supone que un gobierno adopta dos decisiones con respecto a su balance financiero: en primer lugar, decide que parte de su deuda adopta la forma de base monetaria (politica monetaria) y, en segundo lugar, en que monedas se denomina el resto de su deuda no monetaria (politica de inter- vention). Estas definiciones de politica monetaria y de intervention no de- penden de la intention del gobierno, del regimen de tipo de cambio (por ejemplo, tipo de cambio fijo o flotante), ni de los mecanismos particulares utilizados para alterar el balance financiero del gobierno. Se presentan estimaciones de la intervention en el mercado de divisas en un gran niimero de paises industrials y en desarrollo. Estas estimaciones indican que, desde 1973, la politica de intervention de los principales paises industriales solo ha dado lugar a pequenas variaciones de la composition relativa de los activos no monetarios denominados en las monedas de los paises industriales. Esto podria explicar la idea, ampliamente generalizada, de que desde 1973 la politica de intervention de los principales paises industriales no ha constituido una fuerza importante en el mercado de divisas. Sin embargo, las intervenciones de los paises en desarrollo y de los pequenos paises industriales han originado grandes variaciones de la composition relativa de la deuda no monetaria deno- minada en las monedas de los paises industriales. El que los trabajos empiricos realizados hasta ahora no hayan permitido establecer un vinculo entre la politica de intervention de los paises industriales y los tipos de cambio entre sus mo- nedas, se sugiere, podria deberse al hecho de que no se han establecido modelos de los efectos que ocasiona la politica de intervention de terceros paises. Diferenciales en los tipos de interes y riesgo cambiario: La reciente experiencia argentina—MARIO I. BLEJER (paginas 270-79) Se ha estudiado extensamente la relation entre los diferenciales inter- nacionales en los tipos de interes y las variaciones de los tipos de cambio de las principales monedas. En el caso de los paises industriales, en general tiene validez la hipotesis de paridad en la tasa de interes, despues de tomar en cuenta los costos de transaction, los riesgos politicos, los controles de cambios y los diferentes sistemas tributarios. Cuando no existe un mercado a termino para la moneda, el diferencial en los tipos de interes tiende a ser igual a la variation prevista del tipo de cambio, habida cuenta de los factores mencionados, pero tambien incluira una prima de riesgo para compensar la existencia del riesgo cambiario. En este estudio se examina la experiencia de la Argentina despues de haberse liberalizado su mercado financiero. Se demuestra que durante el periodo com- prendido entre junio de 1977 y agosto de 1981 los diferenciales en los tipos de interes observados, ajustados segun las variaciones del tipo de cambio, no ma- nifiestan ninguna estructura definida de correlation serial y, por consiguiente, se comportan como errores de pronostico en un mercado eficiente. Una inter- ©International Monetary Fund. Not for Redistribution 362 INTERNATIONAL MONETARY FUND STAFF PAPERS pretacion logica de este resultado es que, si bien los activos internes y externos probablemente no constituyen sustitutos perfectos, el mercado financiero argen- tine es eficiente desde el punto de vista informacional y se ha caracterizado por una prima de riesgo sobre los activos internos sin autocorrelation serial y que varia con el transcurso del tiempo. Dicho de otro modo, una de las deducciones es que el proceso de liberalization en la Argentina ha propiciado la eficiencia del mercado financiero interne. La Argentina, al igual que los paises industri- alizados, ha ofrecido tipos de inter es vinculados al nivel del mercado mundial previendo, en general, las depreciaciones del peso frente al dolar de EE.UU. y facilitando la compensation de las mismas. ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution In statistical matter (except in the resumes and resumenes) through- out this issue, Dots (...) indicate that data are not available; A dash (—) indicates that the figure is zero or less than half the final digit shown, or that the item does not exist; A single dot (.) indicates decimals; A comma (,) separates thousands and millions; "Billion" means a thousand million; A short dash (-) is used between years or months (e.g., 1977-79 or January-October) to indicate a total of the years or months inclusive of the beginning and ending years or months; A stroke (/) is used between years (e.g., 1978/79) to indicate a fiscal year or a crop year; Components of tables may not add to totals shown because of rounding. International Monetary Fund, Washington, D.C. 20431 U.S.A. Telephone number: 202 477 7000 Cable address: Interfund ©International Monetary Fund. Not for Redistribution