Jeffrey A. Frankel

Kathryn M. Dominguez

How much impact on exchange rates do central banks have when they buy and sell currencies? According to many analysts, such intervention has no independent impact. This book challenges the conventional wisdom, demonstrating that such intervention can be an effective and extremely important tool for policymakers. Using previously unavailable daily intervention data from the US Federal Reserve and German Bundesbank, the authors show that even "sterilized" intervention -intervention that entails no corresponding changes in monetary policy- has a significant effect. A key element is whether the intervention is known to the public: widespread market awareness of the activity adds substantially to its payoff. Authors Dominguez and Frankel draw implications for intervention policy and its role in international economic policy coordination.

Does Foreign Exchange Intervention Work?

Chudozie Okongwu

Sterilization, Expectations, and the Incompleteness of Interest Rate Convergence

Liberalized Portfolio Capital Inflows in Emerging Markets

Alberto Giovannini

Giampaolo Galli

The foreign exchange market is the largest, fastest-growing financial market in the world. Yet conventional macroeconomic approaches do not explain why people trade foreign exchange. At the same time, they fail to explain the short-run determinants of the exchange rate. These nine innovative essays use a microstructure approach to analyze the workings of the foreign exchange market, with special emphasis on institutional aspects and the actual behavior of market participants. They examine the volume of transactions, heterogeneity of traders, the time of day and location of trading, the bid-ask spread, and the high level of exchange rate volatility that has puzzled many observers. They also consider the structure of the market, including such issues as nontransparency, asymmetric information, liquidity trading, the use of automated brokers, the relationship between spot and derivative markets, and the importance of systemic risk in the market. This timely volume will be essential reading for anyone interested in the economics of international finance.

The Microstructure of Foreign Exchange Markets

Christopher A. Pissarides

The NBER International Seminar on Macroeconomics brings together leading American andEuropean economists to discuss a broad range of current issues in global macroeconomics. Aninternational companion to the more American-focused NBER Macroeconomics Annual, the 2005 volumefirst explores macroeconomic issues of interest to all advanced economies, then analyzes topicalquestions concerning the eastward expansion of the European Monetary Union.Jeffrey A. Frankel isJames W. Harpel Professor of Capital Formation and Economic Growth at Harvard University's John F.Kennedy School of Government. Christopher A. Pissarides is Professor of Economics at the LondonSchool of Economics. Both are Research Associates at the National Bureau of EconomicResearch.

NBER International Seminar on Macroeconomics 2005

These seventeen essays provide an accessible and thorough reference for understanding the role of exchange rates in the international monetary system since 1973, when the rates were allowed to float. The essays analyze such issues as exchange rate movements, exchange risk premia, investor expectations of exchange rates and behavior of exchange rates in different systems. Frankel's sound empirical treatment of exchange rate questions shows that it is possible to produce work that is interesting from a purely intellectual viewpoint while contributing to practical knowledge of the real world of international economics and finance.The essays have been organized in a way that provides an introduction to the field of empirical international finance. Part I documents the steady reduction in barriers to international capital movement and leads logically to part II, which explains how exchange rates are determined. Both monetary and portfolio-based models are surveyed in part II, providing a clear transition to the topic of part III; the possible existence of an exchange risk premium. Part IV applies the tools discussed in earlier sections to explore various policy questions related to exchange rate expectations such as whether foreign exchange intervention matters and whether the European monetary system had become credible by 1991. Each part begins with a detailed introduction explaining not only the central issues of that section but also suggesting connections with other essays in the book.Jeffrey A. Frankel is Professor of Economics at the University of California, Berkeley.

On Exchange Rates

National Bureau of Economic Research

K. E. Rockett

The existing literature on international macroeconomic policy coordination makes the unrealistic assumption that policy-makers all know the true model, from which it follows in general that the Nash bargaining solution is superior to the Nash non-cooperative solution. But everything changes once we recognize that policy-makers' models differ from each other and therefore from the "true" model. It is still true that the two countries will in general be able to agree on a cooperative policy package that each believes will improve the objective function relative to the Nash non-cooperative solution. However, the bargaining solution is as likely to move the target variables in the wrong direction as in the right direction, in the light of a third true model. This paper illustrates these theoretical points with monetary and fiscal multipliers taken from simulations of eight leading international econometric models. (It is a sequel to NBER Working Paper 1925, which considered coordination between the domestic monetary and fiscal authorities.) Here we first consider coordination between U.S. and non-U.S. central banks. We find that out of 512 possible combinations of models that could represent U.S. beliefs, non-U.S. beliefs and the true model, coordination improves U.S. welfare in only 289 cases, reducing it in 206, and improves the welfare of other OECD countries in only 297 cases, reducing it in 198. Then we consider coordination with both monetary and fiscal policy. We find that out of 512 combinations, coordination improves U.S. welfare in 183 cases, reducing it in 228, and improves the welfare of other OECD countries in 283 cases, reducing it in 219. A final section of the paper considers possible extensions of the framework, dealing with uncertainty

International Macroeconomic Policy Coordination When Policy-Makers Disa Gree on the Model

Peter R. Orszag

Peter Orszag

An examination of U.S. economic policy in the 1990s, by leading policy makers as well as academic economists.

American Economic Policy in the 1990s

Francesco Giavazzi

Richard H. Clarida

Kenneth D. West

Leading American and European economists discuss monetary and fiscal policy from a global macroeconomic perspective and analyze the implications of European integration; cutting-edge research presented in a companion volume to the NBER Macroeconomics Annual.

NBER International Seminar on Macroeconomics 2004

Richard E. Caves

Ronald Winthrop Jones

This edition contains revised and updated coverage of the multinational enterprise; an updated discussion on the political economy of trade controls; a new section on the Eastern European economies in transition, giving students a framework for understanding their economic effects on the world; an introductory chapter, setting up issues to be discussed in subsequent chapters, providing students with the necessary background; and a new section on trade policies and the development of newly industrialized countries. easily understandable by a wealth of issues and applications. The text's updated information includes material on the multinational enterprise, the political economy of trade controls, and the outcome of the Uruguay Round of international tariff negotiations and the new World Trade Organization.

An Introduction

World Trade and Payments

The paper reviews the obstacles to successful international macroeconomic policy coordination, and then offers a proposal for coordination that is designed to have the best chance of overcoming these obstacles: an international version of nominal GNP targeting. There are three sorts of obstacles to coordination: uncertainty, enforcement, and inflation-fighting credibility. Enforcement is always a problem for coordination, but the problem is particularly great in the presence of uncertainty. This is partly because it is difficult to verify compliance if the "performance criteria" are not directly enough under the control of the authorities and partly because a country may end up regretting ex post the criterion that it agreed to ex ante if the criterion is not directly enough related to the target variables about which it ultimately cares. For example, a country that commits to a narrow range for the money supply may regret the commitment if a shift in velocity occurs. The time-inconsistency of inflation-fighting has been offered as a third reason why policy-makers would be better off renouncing period-by-period coordination of discretionary policymaking. But the way to establish inflation-fighting credibility is to precommit to some nominal anchor. The paper argues that International Nominal Targeting (INT) is the best choice for nominal anchor, as well as the best choice for the performance criterion by which compliance with international agreements can be monitored. Nominal GNP (or, better yet, nominal demand) is superior to other candidates such as M1 as a candidate for the nominal variable on which policy-makers should focus, because it is far more robust to velocity shifts and other uncertainties.

Jeffrey A. Frankel

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