Table Of ContentExchange Rates, Capital Flows, and
Monetary Policy in a Changing World
Economy
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DOI 10.1007/978-1-4615-6175-0
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CONTENTS
Preface: Exchange Rates, Capital Flows, and Monetary Policy in
a Changing World Economy vii
Proceedings of a Conference
Federal Reserve Bank of Dallas
September 14-15, 1995
About the Participants ix
Part I Exchange Rates and Monetary Policy
Presenter: Jeffrey A. Frankel
Moderator: William C. Gruben
Discussants: Leonardo Auernheimer
Steve Hanke
Part " Optimal Exchange Rate Policy for Stabilizing Inflation
in Developing Countries 27
Presenter: Sebastian Edwards
Moderator: Evan Koenig
Discussants: Graciela Kaminsky
John Welch
Appendix to Part /I Exchange Rate Policy and
Macroeconomic Stability 44
By Sebastian Edwards
v
vi CONTENTS
Part III Exchange Rate Volatility, Investment, and Growth:
Some New Evidence 55
Presenter: Vittorio Corbo
Moderator: W. Michael Cox
Discussants: David Gould
Liliana Rojas-Suarez
Appendix to Part 111 Description of the Data 83
Part IV Speculative Attacks 85
Presenter: Peter M. Garber
Moderator: Carlos Zarazaga
Discussants: Guillermo Mondino
Miguel Savastano
Appendix to Part IV Foreign Exchange Hedging with Synthetic
Options and the Interest Rate Defense of
a Fixed-Exchange-Rate Regime 100
By Peter M. Garber and Michael G. Spencer
Part V The Role of the Dollar as an International Currency 129
Presenter: Alan S. Blinder
Part VI International Capital Flows: Direct vs. Portfolio Investment 141
Presenter: Michael P. Dooley
Moderator: John Duca
Discussants: Agustin Carstens
Edwin M. Truman
Appendix A to Part VI A Survey of Academic Literature on Controls
Over International Capital Transactions 165
By Michael P. Dooley
Appendix B to Part VI Are Recent Capital Inflows to Developing
Countries a Vote For or Against Economic
Policy Reforms? 211
By Michael P. Dooley
Part VII Central Bank Coordination in the Midst of Exchange
Rate Instability 223
Moderator: Harvey Rosenblum
Panelists: John W. Crow
Ricardo Hausmann
Allan Meltzer
Miguel Urrutia
The views expressed are those of the
authors and do not necessarily reflect
the positions of the Federal Reserve
Bank of Dallas or the Federal Reserve
System.
PREFACE:
EXCHANGE RATES, CAPITAL
FLOWS, AND MONETARY POLICY
IN A CHANGING WORLD ECONOMY
The dramatic growth of international capital flows has provided unprecedented
opportunities and risks in emerging markets. Investors, policymakers, central
bankers, and other practitioners who interact in these markets participated in a
lively exchange of ideas about these risks and opportunities during a Federal
Reserve Bank of Dallas Conference on September 14-15, 1995. Exchange Rates,
Capital Flows, and Monetary Policy in a Changing World Economy is the
proceedings of that conference.
In Part I, "Exchange Rates and Monetary Policy," Jeffrey A. Frankel concludes
that the system is broken "in the sense that it is not working in the perfect,
idealized way that our theories say." He cautions against radical reforms but
says "some intelligent intervention from time to time cannot hurt and sometimes
can help." Leonardo Auernheimer and Steve Hanke offer comments.
Part II consists of Sebastian Edwards', "Optimal Exchange Rate Policy for
Stabilizing Inflation in Developing Countries," with discussion from Graciela
Kaminsky and John Welch. Edwards focuses on the use of exchange rates as
stabilization devices in anti-inflationary programs. He looks for determinants of
success and considers dangers and challenges of such policies.
In Part ill, Vittorio Corbo discusses his work with Patricio Rojas of Chile's
Central Bank, "Exchange Rate Volatility, Investment, and Growth: Some New
Evidence." Corbo examines how macroeconomic uncertainty about the inflation
rate and the real exchange rate affect economic growth through two mechanisms:
vii
Vlll EXCHANGE RATES, CAPITAL FLOWS, AND MONETARY POLICY
the rate of investment and the overall level of efficiency. Commentary is from
David Gould and Liliana Rojas-Suarez.
In Part IV, "Speculative Attacks," Peter M. Garber reviews theories about
speculative attacks and considers what happens in the days or hours before a
fixed-exchange-rate regime collapses. He relates his comments to two recent
cases, the collapse of the European Exchange Rate Mechanism (ERM) in 1992
and 1993 and the collapse of the Mexican peso at the end of 1994. Discussion
from Guillermo Mondino and Miguel Savastano follows.
Part V is Alan S. Blinder's assessment: "The Role of the Dollar as an Inter
national Currency." Although Blinder finds many claims about the decline of the
dollar as a reserve currency, he concludes that they are remarkably undisciplined
by facts. "Wherever we have data," Blinder says,
the message seems to be more or less the same: the dollar is still unquestionably
the world's dominant international currency by any conceivable definition. But its
preeminent position is eroding slowly, as mainly the Deutsche mark and, secondarily,
the yen move up on the pecking order.
In Part VI, "International Capital Flows: Direct vs. Portfolio Investment,"
Michael P. Dooley challenges conventional wisdom about capital flows, control
of capital flows, and what countries might hope to accomplish with capital
controls. "Both lenders and the borrowers often see international capital flows as
a welfare-reducing phenomenon," Dooley says. But he finds that the motivation
for capital flows derives from government policy: the size of the capital inflow
will be a function of the credibility of the insurance fund. Thus, policy reforms,
particularly fiscal reforms, generate capital inflows, but the size of the capital
inflow will be just sufficient to exhaust the insurance fund, he says. "The only
way, in my view, to break the insurance chain and discourage these kinds of
capital inflows is to introduce uncertainty in the exchange rate and ... make the
private sector investor bear the risk of that investment," Dooley concludes.
AgustIn Carstens and Edwin M. Truman offer comments.
Part VII, "Central Bank Coordination in the Midst of Exchange Rate Instabil
ity," is a panel discussion by Miguel Urrutia, John W. Crow, Ricardo Hausmann,
and Allan Meltzer.
This conference would not have been possible without the efforts of many
people. We wish to thank Bob McTeer, Harvey Rosenblum, Sherry Kiser,
KaSandra Goulding, Agnes Mitchell, Daniel Sanchez, and all the contributors,
who made this conference possible. We also thank our editorial staff-Anne
Coursey, Rhonda Harris, Monica Reeves, and Kathy Thacker.
William C. Gruben
David M. Gould
Carlos E. Zarazaga
ABOUT THE PARTICIPANTS
Alan S. Blinder, now Professor of Economics at Princeton University, was
serving as Vice Chairman of the Federal Reserve Board of Governors in
September 1995. Before that, he was a member of President Clinton's Council
of Economic Advisers, where he worked on forecasting, budget, international
trade, and health-care issues. He is the author or coauthor of lO books, including
Economics: Principles and Policy.
Vittorio Corbo is Professor of Economics at the Catholic University of Chile.
From 1984 to 1991, he served at the World Bank, most recently as chief of the
Macroeconomic Adjustment and Growth Division. He has written more than
80 articles and edited eight books in the field of macroeconomics, economic
adjustment, and development.
John W. Crow is an adviser to the American International Group of companies
and Levesque Beaubien Geoffrion, Inc. He served as Governor of the Bank of
Canada from 1987 to 1994. Formerly chief of the North American Division of
the International Monetary Fund, Crow is a fellow in residence at C.D. Howe
Institute.
Michael P. Dooley, Professor of Economics at the University of California,
Santa Cruz, was formerly Assistant Director of Research at the International
ix
x EXCHANGE RATES, CAPITAL FLOWS, AND MONETARY POLICY
Monetary Fund, He has authored more than two dozen articles on international
capital flows and exchange rate policy, including "Capital Flight, External Debt,
and Domestic Policies," "Exchange Rates, Country-Specific Shocks, and Gold,"
and "Portfolio Capital Flows: Hot or Cold?".
Sebastian Edwards is Professor of Economics at the University of California,
Los Angeles. In September 1995, he was Chief Economist for Latin America
and the Caribbean at the World Bank. Coeditor of the Journal of Development
Economics, he has authored several books, including Exchange Rate Misalignment
in Developing Countries and Real Exchanges, Devaluations, and Adjustment:
Exchange Rate Policy in Developing Countries.
Jeffrey A. Frankel is Professor of Economics at the University of California,
Berkeley, where he is also Director of the Center for International and Develop
ment Economics Research. In addition, in 1996 he served on the Council of
Economic Advisers at the Executive Office of the President. He also has been
a Senior Fellow at the Institute for International Economics and Director for
International Finance and Macroeconomics at the National Bureau of Economic
Research.
Peter M. Garber, Professor of Economics at Brown University, is a consultant
for the International Monetary Fund. Among his published articles are "The
Operation and Collapse of Fixed Exchange Rate Regimes," "The Collapse of
the Bretton Woods Fixed Exchange Rate System," and "The Linkage Between
Speculative Attack and Target Zone Models of Exchange Rates: Some Extended
Results."
Ricardo Hausmann is Chief Economist for the Inter-American Development
Bank and Professor of Economics at IESA, Venezuela's leading graduate school
of business. Previously, he was Minister of Coordination and Planning for
Venezuela, the country's Governor in the Inter-American Development Bank
and the World Bank, and Chairman of the Joint Development Committee of the
International Monetary Fund and the World Bank.
Allan Meltzer is Professor of Political Economy and Public Policy at Carnegie
Mellon University. His work on money and capital markets has led to frequent
consulting assignments with Congressional committees, the U.S. Treasury Depart
ment, the President's Council of Economic Advisers, the Board of Governors of
the Federal Reserve System, and foreign governments and central banks.
Miguel Urrutia is Governor of Colombia's Central Bank, having previously
served the bank as Director. He was formerly Director of the Inter-American
Development Bank's Department of Economic and Social Development and
was Vice-Rector of Development Studies at United Nations University in Tokyo.
Part I
EXCHANGE RATES
AND MONETARY POLICY
The enormous volatility of floating exchange rates has led to a call for limits
on exchange rate fluctuations. An increasing number of countries have begun
to question the benefits of floating exchange rates. Can central banks limit
exchange rate fluctuations, and are there benefits from doing so?
Presenter:
Jeffrey A. Frankel
Professor of Economics
University of California, Berkeley
Moderator:
William C. Gruben
Research Officer
Federal Reserve Bank of Dallas
Discussants:
Leonardo Auernheimer
Professor of Economics
Texas A&M University
1
