Simulations with Model of the U.S. Balance of Payments: The Impact of the Smithsonian Exchange Rate Agreement

(#721 in RFD Series)

INTERNATIONAL FINANCE DISCUSSION PAPERS

SIMULATIONS WITH A MODEL OF THE U.S. BALANCE OF PAYMENTS: THE IMPACT OF THE SMITHSONIAN EXCHANGE RATE AGREEMENT

by

Sung Y. Kwack

Discussion Paper No, 48, June 25, 1974

Division of International Finance

Board of Governors of the Federal Reserve System

The analysis and conclusions of this paper represent the views of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or its staff. Discussion papers in many cases are circulated in preliminary form to stimulate discussion and comment and are not to be cited or quoted without the permission of the author.

Simulations with a Model of the U.S. Balance of Payments: The Impact of the Smithsonian Exchange Rate Agreement

by

Sung Y. Kwack*

Since the realignment of exchange rates by the Smithsonian Agreement of December 1971, substantial research has been conducted to analyze the effect of that exchange rate change on the U.S. balance of payments.

Most of this inquiry, however, focused exclusively on the balance of commodity trade.! The effect on the service and capital accounts and

the indirect effect through changes in foreign holdings of income-yielding U.S. liquid liabilities were not examined. The exchange rate effect on all the components of the U.S. balance of payments--with specific account — taken of the impact on trade, services, and capital flows--deserves systematic analysis. This paper attempts such an analysis utilizing a model of the U.S. balance of payments.

Section I outlines the model and derives theoretically the directions of dynamic response to a change in exogenous variables. Section II presents the prediction errors of the model during the sample period and the multipliers over time of changes in income, interest rates, and prices. Section III assesses the impact of the Smithsonian change in exchange rates on the balance of payments for the year 1972 and later years. Section

IV summarizes the main findings of the paper.

I. A Model of U.S. Balance of Payments An analysis of the impact of changes in exogenously given policy instruments on the U.S. balance of payments with an econometric model

presumes that the model is sound theoretically and empirically. This

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section briefly outlines the model and theoretically identifies the direction of its responses over time to exoyenous shocks resulting from changes in income and price levels and in interest rates.

The model consists of 118 equations including 67 identities for the balance of payments and definitional variables. The current account sector contains 21 behavioral equations explaining the variations in commodity and service transactions including investment incomes. The capital account has 12 behavioral equations describing capital flows between the United States and the rest of the world and 13 equations generating capital stocks. In addition, there are five term structures of interest rate equations determining foreign rates as well as the U.S. long-term rate. The equations of the model (estimated for the period from the third quarter of 1960 through the fourth quarter of 1971) are presented in the Appendix. The basis for the specification of each sector can be found in Kwack [13]-[21] and Kwack and Schink [22}.7

The demand for foreign goods and services excluding investment income is assumed to depend on domestic real income, relative prices, and tariff rates. Income from foreign investments depends on the existing stock of holdings and interest rates. Capital outflows from the United States are viewed as being initiated to achieve the desired level of assets. Asa first approximation, capital flows are described as a Koyck distributed lag function of changes in desired capital stocks. For financial flows, the desired stock is related to a weighted average of current and past incomes, interest rates, and other variables including policy instruments. For direct investment abroad, the desired stock depends on the level of

foreign output, the rental cost of capital at home, and the availability

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of internal funds to invest. Assuming that the United States is the financial center in the world, foreign rates (including Euro-dollar rates) can be regarded as determined by money market conditions in the United States represented by the U.S. Treasury bill rate.

The present specification of the model is considered an improvement over the specifications of Kwack and Schink [22] in several respects. First, the corporate tax and duty rates enter explicitly in the sectors related to direct investment and trade. Second, prices and income in current and past periods are incorporated into the sectors of commodity and services trade to account for lagged influences. Third, a weighted average of current and past incomes is used as a scale variable in the financial capital flow equations. This is consistent with a portfolio theory which treats wealth as the scale variable. Finally, as compared with 11 equations explaining commodity trade volumes and prices at a high level of disaggregation in Kwack and Schink [22], the trade sector employed here contains only 4 equations explaining total trade volume and prices.

A priori information describing how the model as a whole operates is useful for interpreting the multipliers and forecasts generated by simulations of the model. For this purpose, we establish a very simple version of the model. The simple version can be described by the following

four equations:

. . dA , da' B = T*(Y, Y', P, PY, E) + iA- i(A' +R) - T+ (1) dA 1 4 ar 7 VIA*®, Y", 1, T*) - Al, O<v<l (2) da' 1G ' ap Wlae'(y, ¥', i, T*) - A], O<wel (3) ae - kB, O<k<1, (4)

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where Y and Y' represent incomes in the United States and the rest of the world, respectively; i and P are the U.S. interest rate and prices; and A is the level of U.S.-owned assets abroad. The U.S. overall balance of payments and the balance of commodity trade and services excluding invest~ ment income are denoted by B and T. .Primed symbols denote analogously defined variables for foreign country, and E is the exchange rate defined as the number of U.S. dollars per unit of foreign currency. All the assets are assumed to be denominated in U.S. dollars. The v and w represent the parameters for the rate of adjustment. A star (*) indicates a functional relationship determining the desired level of the variable. Equation (1) determines the balance of payments simultaneously with capital flow equations (2) and (3). Equation (4) posits that a fraction, k, of a deficit in the balance of payments is financed by an increase in income yielding U.S. liquidity liabilities to foreigners, B, such as time deposits and Treasury bills.

As in Kwack [20], the excess of investment income over capital flows

can be rewritten in terms of desired stocks.>

iA - “ = at(y, Y', i, TA)(A - (vt ie“) (5) ’ ~ ia'- aa = at'(y, Y', i, TAC - (wtie). (6)

Upon substituting (5) and (6) into (1), the change in the income-yielding liquidity liabilities of the United States per unit of time can be expressed as a differential equation:

& k ik - (TA + A*(i - (v + i)eY) - aR'(d - (wHide ")). (7)

Differential equation (7) is solved with the condition R = 0 at the initial

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period t = 0 to yield the following expression for the liquidity liabilities

at time t:

_ kit, ,T* + A*¥i - Aki kit -vt, ,k(v + i)A*' R= (1 - e°) -—j ) - (e -e OCs » (8) kit -wt, ,k(w + i)A*' + Ce eda

Differentiating (8) with respect to time and using equation (4) we derive the balance of payments equation at period t:

kit e

+ i)A*, — (w+ i)A*!

= * ete akT = eG (& Awor SAS B [TX + Aki — ATE ki Tg? WF kL )J (9) _ evt v(v + i)A* + owt w(w + i)A*' v + ki w+ ki

For expositional purposes, we assume that the rate of adjustment of the foreign assets by U.S. investors is identical to the rate of adjustment by foreign investors. Then, w = v and the balance of payments equation (9) simplifies to

v(1-k)

[T* + i(A* - A*') ——— ] - e

exit vtki

~vt pv (ti) (At-AA") 5

Be vtki

(10)

This equation describes the way in which the balance of payments condition is generated by the model when changes in income, prices and interest rates are initiated exogenously.

At the initial period t = 0, equation (10) shows that the balance of payments equals a sum of the trade balance and the capital account balance. After an infinite number of periods, the balance is determined by the trade balance, asset positions, and the foreign preference to hold income-yielding U.S. liabilities. Suppose that a foreign country reacts to a U.S. payments surplus by an equivalent reduction in its non-income yielding U.S. liabilities, such as demand deposits. In this case k= 0,

and the balance of payments worsens over time, other things being equal,

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if an initial improvement comes from net capital inflows. Of course, the payments condition remains unaffected if the initial improvement results from a surplus in the trade balance. If k > 0, a surplus in the payments means a reduction in income-yielding U.S. liabilities. This reduces income payments to foreigners over subsequent periods. In turn, the balance of payments tends to improve in later periods.

For policy analysis it is important to have information on the effects of increases in income, prices, and interest rates over time. This information can be obtained by differentiating equation (10) totally and determining the signs of the total derivatives. The directional signs and the difference in magnitude at the initial and later periods (t = 0 and t = ~) are given in Table 1 for the case k = 0. The signs for the case k > 0 are easily conjectured from the table. However, we may note that the sign at the initial period is independent of k and that the long run effect is greater for k > 0. As expected, a rise in foreign income and prices, including exchange rates, improves the balance of payments over time, provided that the Marshall-Lerner condition holds. The reverse is the case for an increase in U.S. income and prices. Although a rise in the U.S. interest rate improves the payments in the short run, it eventually leads to a deterioration in the balance of payments.“ Other things being equal, the period required for reversing its effects is longer,

as the level of U.S. assets existing at the initial period is higher.

II. The Properties of the Model This section examines the prediction errors of the model during the sample period and presents its dynamic response to changes in income,

prices, and interest rates. Comparing the dynamic responses obtained

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by dynamic simulation with the directional changes described above, one can judge the adequacy of the model for policy analysis. We ran a dynamic simulation over the sample period 1960III-1971IV in the sense that the values of all the lagged exogenous variables used are those generated by the simulation itself. The mean bias and root mean squared errors are computed as the statistics representing the prediction errors of the model, obtained when the model is run dynamically. Table 2 summarizes the statistics for major components of the model. According to these statistics, the model as a whole performs remarkably well; most variables have a mean bias and root mean squared error of less than $0.1 and 1.0 billions, respectively. The plus sign of the mean bias indicates that the predicted values of variables are lower than the actual values. According to the mean biases, the model would generate an under-prediction of the current balance and an over-prediction of the capital balance. Therefore, the errors of prediction in the current balance partially offset the errors in the capital balance. There is a tendency for the trade balance to be lower than the actual balance primarily through an overprediction of imports. On the other hand, the model appears to predict the U.S. and foreign interest rates reasonably well but somewhat higher than they actually are. It is important to point out here that the U.S. import sector seems to need further improvement in specification because its mean bias, $0.15 billion, is the highest among those of individual sectors. In fact, this sector may be the main source of high mean biases in the current balance as well as the liquidity payments balance. The actual and simulated values are plotted in Figure 1 for two

aggregate measures of the condition of the U.S. balance of payments, namely,

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the current account and the balance of payments on a liquidity basis.

The plot is designed to show whether the errors generated during the simulation process tend to offset each other and to observe whether the model would indicate the proper changes in direction. Figure 1 reveals that the predicted values move in the same direction as the actual values. Out of the 31 turning points in the current account balance, the model predicts 30 points. On the other hand, out of 24 points in the liquidity payments balance, only 18 points are predicted by the model. The model is able to trace out the actual movements of the payments and components reasonably well. Moreover, the predicted errors of the model tend to offset each other over a long period. This indicates that the model can be used for long-term simulations aud eyually well for short-term simulations to analyze the impact of policy actions.

A dynamic simulation with a unit of change in a specific variable produces predicted values that might have occurred, if the change had taken place at the initial period of the simulation. The simulation without the change, called the control solution, is a pseudo-actual analogue to the period of simulation. Hence, the differences between the predicted values with and without the particular change are the potential impacts expected from the action. If no normalization is performed, the magnitudes of the changes are not multiplier estimates in the usual sense. For convenience, however, they are referred to here as mltipliers.

We performed six dynamic simulations, starting from the third quarter of 1960 through the fourth quarter of 1971. One simulation is the control solution and the other five are for different changes in the following

variables which are assumed to be exogenous in the model: (1) a 1% rise

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in U.S. real income variables, (2) a 1% rise in foreign real income, (3)

a 1 percentage point rise in the U.S. Treasury bill rate, (4) a 1% increase in U.S. prices, and (5) a 1% increase in foreign prices. Then, we computed the values of the U.S. balance of payments and major components that changed from their values in the control solution. The multiplier estimates were, in general, found to have nearly stabilized by the fifth year after the initial changes were made, and to be unambiguous in direction. It

is known that the variances of the multiplier estimates increase with

time due to accumulation of errors. Consequently, multiplier estimates only up to five years will be examined in this paper.

Tables 3-7 summarize the results of the simulations with respect to the effects on U.S. balance of payments of each of the five cases. One important point to indicate at the outset is that foreigners increased their holding of income-~yielding U.S. short-term liabilities when the U.S. payments were in a deficit. In other words, 0 <k <1. Therefore, a deficit in the U.S. payments is expected to raise the deficit in subsequent periods through incurred income payments to foreign holders. Taking this into account, the multiplier estimates showing the direction of changes in the U.S. payments and major components for the five cases are generally in line with what we expect from the a priori analysis of Section I.

As indicated in Table 3, a 1% rise in the level of U.S. real income variables (which, for example, is a rise of $4 billion in disposable income) decreases the balance on the current account and overall payments by about $0.323 and $0,363 billion during the first year. While the decreases in balance of both current account and payments are monotonic, the balance of the capital account reaches a peak value of a deficit of $0.1 billion

after 10 quarters and then starts to turn favorable. This later peak period

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is due to the differential lags inherent in the capital flow equations. From the table, it is clear that the overall payments and current account balance in the long run move in the same direction and that a deficit of about $1.00 billion may be the impact of the rise in U.S. income over six years. By contrast to the case of U.S. income, the 1% rise in foreign real income variables (which, for example, is an increase of $0.6 billion in foreign gross national product weighted by trade shares) leads to an increase of $0.203 and $0.104 billion in the balance of current account and overall payments, respectively, for the initial year, as shown in Table 4. The balance of capital account is reduced by about $0.099 billion. This is mainly due to the rise in U.S. direct investment induced by increased economic activity abroad. As a result of a continuing decline in U.S. investment, the effect on the balance of payments and current account balance results in a rise of $0.400 billion after the fifth year.

As shown in Table 5, a 1 percentage point rise in the U.S. Treasury bill rate improves in the first year the balance of the capital account and overall payments by $1.463 and $1.380 billion, respectively. The interest rate appears to have the highest impact on the payment after 12 quarters and thereafter slowly drifts downward. This is because capital flows are merely the reflection of adjusting the stocks to desired levels and U.S. assets are larger than U.S. liabilities. Decreasing net capital outflows in the earlier periods produce a surplus in the overall payments after the fifth year. But, the level of the surplus tends to diminish over time.

Turning to Table 6, we find that the impact on the current account of

a 1% rise in U.S. prices at the initial year results in an improvement

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-19-

of $0.062 billion. The value of U.S. exports is increased by $0.102 billion due to the price elasticity of less than one. The value of U.S. imports rises by $0.041 billion approximately. On the other hand, its impact on the capital account is a reduction of $0.857 billion which is attributable mainly to high direct investment outflows. As the reader may be aware, the U.S. direct investment outflows are related positively to the percentage rate of four quarter increases of the price deflator of U.S. Gross National Product (which is a factor in the rental price of domestic capital). Since the 1% rise in U.S. price level causes changes in the rate of inflation only for the first year, the balance of payments effects are similar to the current account balance effects over time. After the fifth year, consequently, the payments impact, deficit of $0.719 billion, is roughly the sum of a deficit of $0.515 billion in the trade account and of $0.154 billion in the investment income balance. -

The dollar prices of foreign goods and services determine the trade and service transactions. Consequently, the effects of changes in foreign currency prices are taken to be identical to the effects of changes in foreign exchange rates in the model. It can be seen from Table 7 that within one year a 1% rise in foreign prices would reduce the overall payments and current account by $0.045 and $0.134 billion, respectively. This large initial impact is due, in part, to both an increase in the value of U.S. exports by $0.054 billion and a decrease in the value of U.S. imports by $0.056 billion. The effect on U.S. imports differs noticeably from what we found for a rise in U.S. prices which increases the value of U.S. exports initially. This is, in part, due to the prevalence of

regressive expectations on import prices in the future, which is represented in

-20-

the negative coefficient of the variable of rate of change in import prices in the model.” In other words, the regressive expectations on import prices affect the volume of U.S. imports, in addition to relative prices and

real income. Thus, the rate of increase of U.S. import prices have had

a great negative impact on the volume of U.S. imports in the first year. However, the change in price inflation induced by a rise in the foreign prices ceases after the second year. Thereby the volume of U.S. imports comes to depend only on income and relative prices. As expected, the change in the overall payments in later periods follows closely the improvements in the investment income and trade account balance. The impact on the overall payments at the fifth year is about $0.78 billion, whereas

that on the trade balance is about $0.56 billion.

III. Smithsonian Exchange Rate Effects on U.S. Balance of Payments

The devaluation of the U.S. dollar accomplished by the Smithsonian Agreement of December, 1971, was about 8 percent against a trade-weighted average of exchange rates prevailing during the first quarter of 1971 for the group of 10 industrial countries excluding the United States and Switzerland. This reduction in the dollar price affects the prices of traded goods in local currency and economic activity in the world. Quantitative information on the induced changes in domestic prices and incomes are unavailable. Therefore, the effect on the balance of payments is estimated only by the change in exchange rates.

Table 8 contains a summary of the forecasts of the balance of payments for the year 1972 and the exchange rate effects derived from dynamic

simulation of the model from the first quarter of 1972. A plus sign on

-21-

the forecast errors means that the predicted values are lower than the actual values. The model over-predicts the balance of current account

by $5 billion and under-predicts the balance of capital account by $2 billion during 1972. Thus , the prediction on the liquidity balance of payments, a deficit of $12 billion, is more than the actual value by $3 billion. Looking at the forecast errors in detail, it is not difficult

to pinpoint that the main source is the under-prediction of the import volume by about $3 billion, which will be discussed below.° The remaining sectors are forecast with a high degree of accuracy.

As compared with what would’have been expected had the exchange rates during the first quarter of 1971 prevailed for the year 1972, the actual depreciation of U.S. dollars contributed to an improvement in the U.S. balance of payments in 1972 by about $2 billion. Its contribution to the current account balance is an increase of approximately $3.59 billion.

This is made possible through improvements in the trade balance by $3.2 billion, the investment income balance by $0.17 billion, and the travel

and transportation balance by $0.13 billion. Capital outflows resulting

from the change in exchange rates are about $1.6 billion; the capital inflows are about $0.14 billion. The estimate covers these effects by changing the dollar value of foreign income and the U.S. trade balance and excludes the effects of induced changes in interest rates. To the extent that interest rates are sensitive to variations in rate of change in exchange rates, the estimate given here could understate the net outflows. Never-—theless, an interesting point to be noted is that the induced deterioration in the capital account is equal to about 45% of the improvement in the current account. If one accepts this finding, one could generalize that

the effect of an exchange rate change on the balance of payments in the short

run is smaller than the effect on the current account or trade balance.

~22—

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-23+

The trade balance is estimated to improve by $3.3 billion by the first year following the depreciation. This combines a rise of $1.7 billion in the value of U.S. exports and a fall of $1.6 billion in the value of U.S. imports. The latter is due primarily to a reduction of the import volume by $3 billion. Our estimate of the exports change is similar to others, but the estimate of the change in imports appears to contradict the argument that the change in exchange rates would increase the value of U.S. imports because of inelastic demand in the short run following the depreciation,’ However, our estimate on imports, -$1.6 billion, consists of the initial perverse efféct through changes in relative price, $2 billion, and the regressive expectation effect through changes in import price inflation, -$3.6 billion. If no price expectations are assumed to influence imports, our estimate consists only of the rise of $2 billion in the value of imports.8 Therefore, the estimates of Clark [4] and others are consistent with ours in the sense that they examine an exchange rate effect in the absence of change in price expectations.

Contrary to past experience, the increases in the rate of inflation of import prices are followed by later decreases. An increase in the rate of inflation of import prices from the Smithsonian Agreement may lead the public to expect a further increase. This is likely to happen if the dollar devaluation is not considered to be sufficient to reduce the U.S. balance of payments deficit. Then, import price inflation has possible psychological effects modifying the directions in expected price changes. At best, import price inflation might have no temporary effect on the demand for imports because of great uncertainty about future price in-

flation. In this case, the exchange rate effect is equal to the relative

-24-

price effect which is given in Table 8. The resulting estimates of the effect on exports, imports, and the trade balance in 1972 are $1.7 billion, $2.00, and $0.3 billion. In turn, this reduction of trade balance from $3.2 billion to $0.3 billion lowers the effect on the balance of payments from $2 billion to $0.6 billion. The exercise suggests that the exchange rate effect in a short period depends on the conditions which cause the currency depreciation and whether the extrapolative expectations overcome the regressive expectations on prices in the future.” In addition, the forecast error on the volume of imports is reduced from $3 billion to $1 billion. This illustrates that a substantial improvement in the model performance can be expected to be achieved by treating adequately the formation of price expectations.

On the basis of our results on the balance of payments for the year 1972, one can conclude that the dollar devaluation helped to some extent in reducing the U.S. balance of payments deficit. The effect of the devaluation over longer periods is greater in reducing the payments deficit, because the multipliers of the effects of foreign prices over longer periods are greater as shown in Table 7. That is to say, the devaluation of about 8% would have a positive effect on the trade and service account of $4.4 and $2.2 billion, respectively, by the fifth year, 1976. The impact on the capital account would be a reduction of $0.5 billion. As a result, the balance of payments is $6 billion higher than the value we would have in the absence of the depreciation. As argued before, the estimate of the long-run effect has a large variance. As shown by Branson [2] and Kwack [21], the rate of change in relative prices due to the

devaluation is likely to be less than the rate of the devaluation.

-25-

In a world of growing interdependence, a dollar depreciation would induce changes in income and prices at home and abroad, 10 Therefore, the estimate of the effect over longer periods may be subject to a substantial

margin of error.

IV. Summary

This paper aims at providing estimates of the effects of exchange rate changes on the capital account as well as on the current account by utilizing a model of the U.S. balance of payments. Use of the model permits us to account not only for the direct effects on individual components of the balance of payments account, but also for the transmission of the changes in the balance of payments to individual components in successive periods.

The prediction errors and the direction of income, interest rates, and price multipliers over time séem very reasonable. This supports the use of the model to study the exchange rate effects. The model is still in the process of refinement, and the results reported here represent preliminary findings. At this stage, however, the following summary can be made of the exchange rate effects expected to hold, other things being equal.

First, the devaluation of the U.S. dollar during 1972 is estimated to be about 8% of the exchange rate prevailing during the first quarter of 1971. The devaluation seems to have reduced the U.S. balance of payments deficit by $2 billion in 1972. An improvement of $3 billion in the U.S. balance of commodity trade is made by the devaluation. This

estimate is higher by about $2 billion than the estimates by other studies

-26~

which obtained perverse price effects on imports in the short run. The difference in estimates depends essentially on the different view regarding the psychological effects of exchange rates on price expectations. If the dollar devaluation shifts either temporarily or permanently from the regressive expectations in the past toward neutral expectations, the balance of trade estimate is reduced by $0.3 billion, according to our results. Second, the impact on service transactions in 1972 is a rise of $0.3 billion. The balance of capital account is estimated to be a net outflow amounting to $1.6 billion. This negative impact partially offsets the positive effect on the balance of current account, $3.6 billion. Consequently, the effect of a change in exchange rates on the balance of payments is about 55% of the effect on the current account balance. This implies that the depreciation of the U.S. dollar to reduce a given level of the payments deficit in the short run is greater than the depreciation required for reducing the equal amount of the current account deficit. According to the above, the former is about twice as large as the latter. Third, at the fifth year, 1976, the devaluation is estimated to improve the balance of payments by $6 billion which is higher than expected in the absence of the devaluation. The commodity trade and service balance are improved by $4.4 and $2.2 billion, respectively. The exchange rate effect on capital flows can be estimated to be insignificant after five years following the devaluation. This reflects the character of the model that the long-run impact on the balance of payments of a change in an exogenous variable is dependent upon its impact on the trade and service accounts, in particular investment income. .

The analysis of the effect of exchange rate changes in this paper

-27-

excludes the direct effect on capital flows through changes in wealth and the indirect effect through influencing interest rates. For a more accurate analysis, the linkage of exchange rates with interest rates and the treatment of capital gains due to changes in exchange rates deserve more attention. The effects of induced changes in income and price levels at home and abroad are also left out of consideration in order to isolate the direct effect of changes in exchange rates. Further effort should be directed to examining the influence of changes in foreign exchange rates on domestic and foreign activities, prices, and balance of payments simul-

taneously. These tasks are beyond the scope of this paper, however.

-28- FOOTNOTES

“the author is an economist, Division of International Fiannce, of the Board of Governors of the Federal Reserve System. He would like to acknowledge his indebtedness to Peter Clark, Gary From, Howard Howe, Lawrence Klein, Charles Schotta, Guy Stevens and Thomas Willett for helpful discussion relating to the paper and the balance of payments modeling and to thank David Coe and Sam Parrillo for skillful research assistance. A substantial portion of the work was completed while working at the U.S. Department of Treasury. The analysis and conclusions of this paper are solely those of the author and should not be interpreted as necessarily reflecting the views of either the Board of Governors of the Federal Reserve System or the Department of the Treasury.

Ithe works of Branson [2] and Clark [4] are notable examples.

2OASIA Technical Report [30] designed to assist the users of the

model in the DRI computer system contains the list of equations. But, it does not include several revised sectoral equations reported in the Appendix.

33 is assumed in Kwack [20] that U.S. income grows at a constant and positive rate. As a result, the formula differs from equation (5), but does not change the results regarding the direction of a change of predetermined variables such as income and interest rates. To simplify our calculations, we treat income, interest rate and prices as shifting parameters.

‘his result follows directly from the "new view" of capital flows given by [1], [22] and others. Even if capital flows are determined by levels of interest rates instead of the changes in interest rates, the conclusion holds. However, the length of time needed for the reversal of the interest rate effects is likely to be much longer than the period of time suggested in the new view.

Sthe import equation in the model is an attempt to incorporate into the standard specification of income and relative prices [15], a dynamic element of how a market responds at least in a short-run to a change in import price inflation. While the market reactions reflect both regressive and extrapolative expectations of future inflation, the estimated equation indicates that the regressive element has dominated during the decade of the 1960's.

-29-

Orne difficulty of predicting U.S. imports in recent years is well known. For example, Magee [21] reported that the shortfalls of the 1970 and 1971 trade balance predicted by his trade model estimated during 1951-1969 are attributable largely to the under-predictions of imports by $2.75 and 2.53 billion, respectively. He explained this in terms of purely short-run factors such as anticipation of dock strikes and foreign revaluation in addition tc some specification problems.

"clark [4] reported that the increase of U.S. imports excluding automobile imports from Canada, fuels and lubricants due to the exchange rate in 1972 is about $0.97 billion whereas the increase of U.S. exports exclucing aircrafts and automobile exports to Canada is about $0.97 billion. Junz and Lowrey [10] argue that the effect on the trade balance for the year 1972 will be very little. It is pointed out here that the perverse effect in the short run does not necessarily follow from the long lags in price effects on the trade volume shown by Junz and Rhomberg [9].

Bie also assume the existence of a money illusion at least in the short run. Whether this constitutes a specification error is an unresolved issue in the theoretical literature. However, Branson and Klevorick [3] showed the presence of money illusion on U.S. aggregate consumption.

rhe time required for a currency depreciation to realize the full impact on the trade balance of a country appears to differ from one country to another and to vary from one time to another even for the same country. This is shown by Deppler [5]. For instance, he argued that the German revaluation of 1961 had fairly rapid effects, but the revaluation of 1968 did not take effect until 1973.

0p e limitations of elasticity approach are pointed out by those who analyze a currency depreciation in terms of a general equilibrium framework and by those using the monetarist approach to devaluation, such as Dornbusch [6], Johnson [8] and Laffer [23].

~30-

APPENDIX

QUARTERLY MODEL OF UNITED STATES TRADE AND CAPITAL FLOWS

Estimated from 1960:3 to 71:4 by Ordinary Least-Squares

I, BEHAVIORAL EQUATIONS

. Commodity Sector

Service Sector Excluding Investment Income Investment Income Sector

. interest Rate Sector

. Capital Sector

. Balance of Payments Identities

Amu aw Pp

II. DEFINITIONS OF COMPOSITE VARIABLES

III. VARIABLE NOTATIONS AND SOURCES

-31-

APPENDIX

Kwackmodel of United States Trade and Capital Flows: 1971 Version

‘Quarterly, 1960:3 to 71:4 Ordinary Least Squares

I. BEHAVIORAL EQUATIONS A. COMMODITY SECTOR (A.1) Export Volume

LOG (EXG63/FYDVD63) = -1.8453 + 0.0475%Q1 + 0.0555*Q2 - 0.0797%Q3

(3.56) (3.01) (3.55) (5,26) + 0.07654WPIFTARF + 0,1338*WPIFTARF(-1) + 0.1720*WPIFTARF (-2) (1.97) (1.97) (1.97) + 0.1912*WPTFTARF (-3) + 0.1912*WPIFTARF(-4) + 0.1720*WPIFTARF (-5) (1.97) (1.97) (1.97) + 0.1338*WPIFTARF(-6) + 0.0765*WPIFTARF(-7) - 0.0019*FYDVD63 (1.97) (1.97) (3.47) ~ 0.0629*DMYILST - 0,0544*DMYNEP (5.81) (1.85) R? = 0.782 SEE = 0,036 DW = 2.094

(A.2) Export Price

LOG (PEXG63) = 1.0170 - 0.1997*(1.0/PXEAF63) - 0,2996*[1.0/PXEAF63(-1) ]

(39.18) (36.36) (36.36) - 0.2996*[1.0/PXEAF63(-2)] - 0.1997*[1.0/PXEAF63(-3)] (36.36) (36.36) s2

R’ = 0.967 SEE = 0.014 ~ DW = 0.556

—-32—

(A.3) Import Volume

LOG (IMG63/YD63) = -6.1607 - 0.0502*Q1 - 0.0018%Q2 - 0.0228*Q3 (6.42) (3.00) (0.10) (1.36)

- 1.38254L0G[PIMG63/PIMG63(-4)] + 0.0709*WPI63TAR + 0.1300*WPI63STAR(-1) (3.73) (2.07) (2.07)

+ 0.17734WPI63TAR(-2) + 0.21274WPI63TAR(-3) + 0.2363*WPI63TAR(-4) (2.07) (2.07) (2.07)

+ 0.24824WPI63TAR(-5) + 0.2482*WPI63TAR(-6) + 0.23634WPI63TAR(-7) (2.07) (2.07) (2.07)

+ 0,.2127*4WPI63TAR(-8) + 0.1773*WPI63TAR(-9) + 0.1300*WPI63TAR(-10) (2.07) (2.07) (2.07)

+ 0,0709*WPI63TAR(-11) + 0.0026*YD63 - 0.0372*DMYILST - 0.1196*DMYSUEZ (2.07) (21.04) (3.10) (3.98)

Re = 0.948 SEE = 0.040 DW = 1.449

(A.4) Import Price

LOG (PIMG63) = 1.0960 - 0.2160*(1.0/WPIFMIFERIM) - 0.3240*[1.0/WPIFMIFERIM(-1) ]

(35.52) (33.23) (33.23) - 0.3240*[1.0/WPIFMIFERIM(-2)] - 0.2160*[ 1.0/WPIFMIFERIM(-3) ] (33.23) (33.23) R? = 0.961 SEE = 0.014 DW = 0.379

B. SERVICE SECTOR EXCLUDING INVESTMENT INCOME

(B.1) Travel Export

RXTVSUM/WCONF63 = 0.0765 + 0.0009*Q1 + 0.0090*Q2 + 0.0129%*Q3 (4.20) (1.44) (14.27) (21.09)

- 0.0143*RPC63 - 0.0123*RPC63(-1) - 0.0102*RPC63(-2) - 0.0082*RPC63(-3) (3.33) (3.33) (3.33) (3.33)

- 0,0061*RPC63(-4) - 0.0041*RPC63(-5) - 0.0020*RPC63(-6) (3.33) (3.33) (3.33)

+ 0,.00009*WCONF63 (2.55)

R2 = 0,929 SEE = 0,002 DW = 0,945

-33-

(B.2) Travel Import RMTIVSUM/WYD63 = 0.0129 - 0.0003*Q1 + 0.0028%Q2 + 0.0053*Q3

(3.89) (2.43) (25.61) (47.52) - 0,00244RPCFUS - 0.0021*RPCFUS(-1) - 0.0017*RPCFUS(-2) - 0.0014*RPCFUS(-3) (2.65) (2.65) (2.65) (2.65) - 0,0010*RPCFUS (-4) - 0.0007#RPCFUS(-5) - 0.0003*RPCFUS(-6) (2.65) (2.65) (2.65) + 0.000004*WYD63 + 0.0007*DMYEXPO67 + 0.0004*DMYEXPO70 (3,82) (5.27) (3.00) R? = 0.989 SEE = 0.001 DW = 2.164

(B.3) Other Transportation Export ABOPEXSTROT = 0.4371 - 0.1593*Q1 + 0.1148*Q2 + 0.0987%*Q3

(5.87) (3.20) (2.31) (2.03) + 0.0629*0 .5*[ABOPEXG + ABOPEXG (-1) ] (27.92) R* = 0.948 SEE = 0,119 DW = 1.832

(B.4) Other Transportation Import ABOPIMSTROT = 0.4833 - 0.1452*Q1 + 0.0234*Q2 + 0.0423*Q3

(3.95) (3.25) (0.52) (1.00) + 0.0379%0,5*[ABOPEXG + ABOPEXG(-1)] + 0.0203*0.5*[ABOPIMG + ABOPIMG(-1) ] (3.03) (2.09) Re = 0.960 SEE = 0.104 DW = 1.722

(B.5) Export of Miscellaneous Services

XMISDPC = 0.0004 + 0.0796%Q1 + 0.0176*Q2 + 0.0558*Q3 (0.01) (3.38) (0.75) (2.43)

+ 0.0182* (ABOPEXG + ABOPIMG) /PC63 (26.31)

R = 0.939 SEE = 0.056 DW = 1,261

-34-

(B.6) Import of Miscellaneous Services

MMISDPC = 0.2113 - 0.0312*Q1 - 0.0655*Q2 + 0,2242*Q3

(2.54) (1.04) (1.62) (5.63) + 0.0081*(ABOPEXG + ABOPIMG) /PC63 + 0.3113*MMISDPC(-1) (5.01) (2.38) —2 R = 0.876 SEE = 0.064 DW = 2.139

(B.7) Private Remittance and Other Transfers

ABOPIMUTPRDPC = -0.1010 - -0367*Q1 + 0.0534%*Q2 + 0.0290*Q3

(2.05) (1.80) (2.57) (1.45) + 0.0015*¥D63 + 0.1840*DMYMECPR (15.09) (8.01) R- = 0.887 SEE = 0.049 DW = 1.241

C. INVESTMENT INCOME SECTOR

(C.1) Exports of Fees and Royalties

ABOPEXSFR = -0.1941 - 0.1981*Q1 + 0.0403%*Q2 - 0.1299%Q3

(2.02) (4.37) (0.86) (3.16) + 0.0173*FGNPUM(-1) + 0.4245*ABOPEXSFR (-1) (4.28) (3.00) R = 0.983 SEE = 0.081 “DW = 2.611

(C.2) Imports of Fees and Royalties

ABOPIMSFR = -0.0353 + 0.0079*Q1 + 0.0001%Q2 - 0.0006*Q3

(2.91) (1.72) (0.01) (0.12) + 0,00017*GNP(-1) + 0.4097*ABOPIMSFR (-1) (4.06) (2.90) —2 R = 0.954 SEE = 0.011 DW = 2.09

-35-

(C.3) Receipts of Direct Investment Interest, Dividends, Branch Earnings and Reinvested Earnings

ABOPEXSYPDIPRE = 0.5390 - 1.1470%Q1 - 1.0890*Q2 - 1.4262*A3

(1.74) (3.67) (4.74) (6.55) 0.0960*NAUDINQ + 0.2611*ABOPEXSYPDIPRE (-1) (3.99) (1.29) R* = 0.946 SEE = 0.504 DW = 1.787

(C.4) Receipts of Direct Investment Interest, Dividends and Branch Earnings

ABOPEXSYPDI = 0.3163 - 0.2550*Q1 - 0.2850*Q2 - 0.4157%*Q3

(3.04) (3.37) (3.77) (5.53) + 0,6887*ABOPEXSYPDIPRE (54.22) R = 0.987 SEE = 0,178 DW = 1,220

(C.5) Payments of Direct Investment Interest, Dividents, Branch Earnings and Reinvested Earnings

ABOPIMSYPDIPRE = 0.0545 - 0.0790%Q1 - 0.1112%*Q2 - 0.0926*Q3

(0.66) (2.47) (3.67) (3.19)

- 0.0196*RU + 0.04744NAFDINQ + 0.5251*ABOPIMSYPDIPRE (-1) (1.58) (3.30) (3.71)

R- = 0.907 SEE = 0.071 DW = 2.239

(C.6) Payments of Direct Investment interest, Dividends and Branch Earnings

ABOPIMSYPDI = -0.0354 - 0.0183*Q1 - 0.0399*Q2 - 0.0363%*Q3 (1.73) . (1.20) (2,62) . (2.43)

+ 0.5694*ABOPIMSYPDIPRE (24.28)

R- = 0.934 SEE = 0,036 DW = 0.848

~36-

(C.7) Receipts of Income on Nondirect Private Assets Abroad ABOPEXSYPFA = 0.1151 - 0.0723%Q1 - 0.0155%*Q2 - 0.1078%*Q3

(4.96) (3.22) (0.74) (5.12) + 0.0035*(RMFLDI*NAUPFQ) + 0.5122*ABOPEXSYPFA (-1) (4.34) (4.54) R? = 0.994 SEE = 0,050 DW = 2.024

(C.8) Payment _to Foreigners of Income on Nondirect Private Liabilities

ABOPIMSYPFA = -0.0303 - 0.0915*Q1 - 0.0030*Q2 + 0.0030*Q3 (0.95) (2.63) (0.08) (0.09) + 0.0045* (RMGBS*NAFPFQ) + 1.0770*ABOPIMSYPFA(-1) - 0.4560*ABOPIMSYPFA (-2) (9.44) (12.08) (6.85) —2 R = 0.994 SEE = 0.083 DW = 1.884

(C.9) Receipts of Income on U.S. Government Assets Abroad ABOPEXSYGFA = 0.4930 - 0.3509*Q1 - 0.2127%*Q2 - 0.3506%*Q3

(12.70) (8.98) (5.44) (9.18) + 0.0034* (RMGBS*NAUGOVQ ) (13.34) R- = 0.866 SEE = 0,094 DW = 1.762

(C.10) Payments of Income on Foreign Investment in U.S. Government

Liabilities

ABOPIMSYGFA = -0.2489 = 0.06434Q1 - 0.0215%*Q2 + 0.0270*Q3 (3.77) (2.53) (0.85) (1.07)

+ 0.0318*NAFGFQ + 0.8427*ABOPIMSYGFA (-1) (2,99) (6.25)

R- = 0.982 SEE = 0.060 DW = 1.472

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D. INTEREST RATE SECTOR (D.1) U.S. Prime Rate on Short-Term Business Loans

LOG(RM1) = 0.1140 + 0.4017*LOG(RMGBS) - 0.1538*LOG[RMGBS (-1) ]

(2,22) (8.19) (2.24) + 0.7206*LOG[RM1(-1)] + 0.0757*DMYMIPTD (11.25) (3.43) 2 R = 0.977 SEE = 0.032 DW = 1.425

(D.2) Yield on Moody's Industrial Corporate Bonds

RMMBCIND = 1.1090 + 0.1232*RMGBS + 0.1066*RMBGS(-1) + 0.0947*RMGBS (-2)

(7.25) (3.28) (8.26) (6,27) + 0,0868*RMGBS (-3) + 0.0821*RMBGS(-4) + 0.0797*RMGBS (-5) (4.99) (5.33) (6.23) + 0.0789*RMGBS (-6) + 0.0787*RMBGS(-7) + 0.0783*RMBGS (-8) (6.31) (5.79) (5.72) + 0.0770*RMGBS (-9) + 0.0738*RMGBS (-10) + 0.0679*RMGBS (-11) (6,21) (6.25) ‘ (4.53) + 0.0585*RMGBS (-12) + 0.0446*RMGBS(-13) + 0.0254*RMGBS (-14) (2.92) (2.01) (1.48) | R2

= 0.960 SEE = 0.275 DW = 0.422

(D.3) Foreign Short-Term Interest Rate

RMFSBL = 1,0229 + 0,3586*RMGBS + 0.5299*RMFSBL(-1) (5.49) (7.63) (8.53)

R- = 0.961 SEE = 0.213 DW = 2.152

-38-

(D.4) Interest Rate on Three-Month Euro-Dollar Deposits in London

LOG (RMSEUROQ) = -0.1985 + 0.4331*LOG(RMGBS) + 0.7516*LOG(RMFSBL)

(1.19) (4.08) (4.36) + 0.0797*TBEURO + 0.0998*DMYCD (3.85) (2.58) Re = 0.945 SEE = 0.078 DW = 0.953

(D.5) Foreign Long-Term Interest Rate

LOG (RMFLDI) = 0.1909 + 0,0537*LOG(RMSEUROQ) + 0.4836*LOG (RMMBCIND)

(2.98) (3.28) (6.35) - 0.3747*LOG[ RMMBCIND(-1)] + 0.7532*LOG[RMFLDI (-1) ] (4.12) (7.77) R = 0.996 SEE = 0.012 DW = 1.906

E. CAPITAL SECTOR

(E.1) Flow of Foreign Direct Investment, Including Retained Earnings,

in the U.S.

IFDI = -1.2657 - 0,2933*RMSEUROQ + 0.6690*RM1 (3.35) (3.01) (4.94)

+ 0.0056*[(1.0 - RTCGFS)*GNP*(1.0 + GUS)] - 0.2494*NAFDINQ

(2.24) ~ 0.7984*DMY661III (2.18)

—2 R = 0.568 SEE = 0.351 DW = 2,325

(E.2) Flow of U.S. Direct Investment, Including Retained Earnings, Abroad

IUDI = -0.2779 + 1.6797*PQA + 0.0725*(ZA - DIV + CCACORP) - 0.2158*NAUDINQ

(0.46) (4.69) (2.50) (2.75) - 4.2643*DMYWD + 0.1560*Q1 - 0.2946*Q2 - 1.7156%*Q3 (7.89) (0.40) (0.83) (4.79) —2

R = 0.866 SEE = 0,757 DW = 1.772

-39-

(E.3) Flow of Foreign Holdings of U.S. Securities Other Than Treasury Issues

ABOPEXAUSS = -3,1633 - 0.2553*RMSEUROQ + 0.9749*RMMBCIND (6.98) (2.50) (6.68)

+ 2.1356*DMY69IV - 1,7634*DMY71II + 3.5180*DMYFDIPA (2.96) (2.54) (9.92)

—2 R = 0.840 SEE = 0.655 DW = 1.976

(E.4)

Flow of Nonliquid Liabilities to Other Official and Private Foreigners Reported by U.S. Government

ABOPEXAPUSGSNL = 1.4911 - 0.2354*Q1 - 0.2376%Q2 - 0.2873%*Q3 (5.09) (1.61) (1.59) (2.01)

- 0,1322*RMCDIM - 0.2558*NAFNLIQPQ + 0.7564*DMY62IV - 0.7228*DMY67IV (4.64) (3.00) (2.18) (2.09)

+ 1,1250*DMY69IV - 0.8026*DMY70II (3.28) (2.31)

R’ = 0.544 SEE -= 0,323 DW = 1.855

(E.5)

Flow of Other U.S. Nonliquid Liabilities to Private Foreigners

ABPEXAPNL = -6.8239 - 0.3509*Q1 - 0.3026%Q2 - 0.6254%Q3 (5.84) (1.34) (1.26) (2.67)

- 0.2235*RMSEUROQ + 1.8888*RMMBCIND + 0.0471*FGNPUM - 1.2664*NAFPNL (2.25) (5.46) (3.01) (5.43)

- 1,4415*DMY671V (2.37)

R- = 0.583 SEE = 0.557 DW = 2.315

-40-

(E.6) Flow of U.S. Liquid Liabilities to Private Foreigners ABOPEXAPSLD = 15.4035 - 4.7390*RMFSBL + 5.8709*RMGBS

(4.07) (3.00) (6.36) - 0,5126* (ABOPEXG - ABOPIMG) - 0.7901*NAFLIQNOFQ + 17.1094*DMY69IT (2.12) (3.59) (6.23) - 12,9551*DMYSP (5.01) Re = 0.745 SEE = 2.643 DW = 2.105

(E.7) Flow of U.S. Liquid Liabilities to Foreign Official Agencies

ABOPEXAGSLD = -0.5854 - 0.8933*(BOPLIQ + ABOPEXAPSLD) (2.07) (34.34)

+ 4,6335*DMY681V (2.62)

R2 = 0.963 SEE = 1.738 DW = 1.709

(E.8) Flow of Errors and Omissions

ABOPEXERROR = -0.7046 - 1.0590*RMSEUROQ - 0.7947*[RMSEUROQ - RMSEUROQ (-1) ]

(0.97) (2.40) (2.41) + 1.3193*RMGBS - 6.8220*DMY71II - 13.0906*DMYSP (2.16) (4.14) (11.04) R2 = 0.812 SEE = 1.533 DW = 2.162

(E.9) Flow of Foreign Securities and Claims by U.S. Nonbanking Concerns

ABOPIMACC = -8.0091 + 0.9699%Q1 + 0.2503%Q2 + 0.3616*Q3 + 1.0108*(1.0 -

(3.64) (2.95) (0.73) (1.15) (2.14) RIET)*RMFLDI - 1.0945*RMMBCIND - 0,7297*RMMBCIND(-1) - 0.3648*RMMBCIND(-2) (2.72) (2.72) (2.72)

+ 0.0375*WLTHGNP - 0.5480*NAUCC + 1.6329*DMY64IV + 2,1674*DMY67IV

(3.61) (3.14) (1.95) (2.65) + 1.8324*DMY68II - 1.5147*DMYSP + 1.7255*(1.0 - VFCR)

(2.25) (2.01) (3.11)

2

R = 0.428 SEE = 0.735 “DW = 1.758

-41-

(E. 10) Flow of Long-Term Claims on Foreigners by U.S. Banks

ABOPIMAPBL = 2.9311 + 0.2120*RMSEUROQ - 0.5732*RM1 - 0.5195*NAUBLQ

(6.40) (2.21) (4.07) (5.73) + 1, 2863*DMY63IV + 1.3864*DMY64IV + 1.9392*DMY651 + 0,00245* (ACBLI*IET63) (3.62) (3.99) (5.51) (4.00) R- = 0.723 SEE = 0.336 DW = 1.972

(E.11) Flow of Short-Term Claims on Foreigners by U.S. Banks

ABOPIMAPBS = -2.3373 - 1.0020*Q1 - 0.6379%*Q2 - 1.2190*Q3 - 0.3464*RMGBS

(1.94) (2.90) (2.01) (8.41) (2.29) + 0,3149*(ABOPEXG - ABOPIMG) + 0.0325*ACBLI - 0.8634*NAUBSQ (3.51) (5.21) (4.62) + 4.0006*DMYSP + 1.7951*DMYJAPWD (5.28) (3.19) R? = 0.756 SEE = 0.731 DW = 2.276

(E.12) Flow of Short-Term Liquid Claims on Foreigners

ABOPIMAPSLD = -0.1396 + 0.4301%Q1 - 0.2589%Q2 - 0.0433%Q3 (0.85) (1.76) (0.91) (0.19)

+ 0.5513*[RMSEUROQ - RMSEUROQ(-1)] - 0.8566*[RMGBS - RMGBS(-1)] (2.54) (2.57)

+ 1,4828*DMY6311 + 1.739*DMY64I1I + 2.0762*DMY68II + 1,8672*DMYSP (2.49) (2.91) (3.45) (4.47)

R = 0.457 SEE = 0.558 DW = 1.764

(E.13) Value of Short-Term Liabilities to Foreign Official Agencies Reported by U.S. Banks

NAFBLOFFQ = 0.25*ABOPEXAGBL(-1) + 0.9999*NAFBLOFFQ (-1) (7129.78)

R = 1.000 SEE = 0.001 DW = 0.680

-42-

E. 14) Value of U.S. Corporate Securities Held by Foreigners NAFCSQ = 0.25*ABOPEXAUSS(-1) + 1.0046*NAFCSQ(-1)

(242.11) oo:

R* = 0.991 SEE = 0.485 DW = 0.641 (E.15) Value of Direct Investment in U.S. by Foreigners ~~ NAFDINQ = 0.25*IFDI(-1) + 1.0001*NAFDINQ (-1)

(1921.34) —2 R = 1.000 SEE = 0.033 DW = 0.648

(E.16) Value of Liquid Liabilities of Private Foreigners

NAFLIQNOFQ = 0.25*ABOPEXAPSLD(-1) + 1.0007*NAFLIQNOFQ (-1) (2305.90)

nw fT]

1.000 SEE = 0.049 DW = 0.404

(E.17) Value of Liquid Liabilities to Official Foreigners NAFLIQOFQ = 0.25*ABOPEXAGSLD(-1) + 0.9989*NAFLIQOFQ (-1) (3200.99)

R* = 1.000 SEE = 0.032 DW = 0.289

(E.18) Value of Nonliquid Liabilities to Other Official and Private Foreigners Reported by U.S. Government

NAFNLIQPQ = 0.25*ABOPEXAPUSGSNL(-1) + 0.9995*NAFNLIQPQ(-1) , (290.68)

R? = 0.997 SEE = 0.039 DW = 0.515

~43-

(E.19) Value of Nonliguid Liabilities to Foreigners Reported by the U.S. Government

NAFNLIQQ = 0.25*[ABOPEXAGUSGSNL(-1) + ABOPEXAPUSGSNL(-1) ] + 1.0005*NAFNLIQQ(-1) (520.48)

R2 = 1.000 SEE = 0,038 DW = 0.520

(E.20) Value of Other U.S, Nonliquid Liabilities to Private Foreigners

NAFPNLQ = 0.25*ABOPEXAPNL(-1) + 1.0006*NAFPNLQ(-1) (486.94)

R- = 0.999 SEE = 0.063 DW = 0.824 (E.21) Value of Foreign Long-Term Claims Reported by U.S. Banks

NAUBLQ = 0.25*ABOPIMAPBL(-1) + 1,.0037*NAUBLQ (-1) (851.55)

R = 0.999 SEE = 0.025 DW = 0.430

(E.22) Value of Foreign Short-Term Claims Reported by U.S. Banks NAUBSQ = 0.25*ABOPIMAPBS (-1) + 1.0027*NAUBSQ(-1) (1377.42)

R? = 1.000 SEE = 0.038 DW = 0.491

(E.23) Value of Foreign Claims Reported by U.S. Nonbanks and U.S, Held Foreign Securities

NAUCC = 0.25*ABOPIMACC(-1) + 1.0027*NAUCC (-1) (952,22) :

R? = 0.999 SEE = 0.147 DW = 0.507

-44-

(E.24) Value of U.S. Direct Investments Abroad NAUDINQ = 0.25*IUDI(-1) + 0.9998*NAUDINQ (-1) (4820, 60)

—2 R = 1,000 SEE = 0.075 SW = 0.537

(E. 25) Value of U.S. Government Held Foreign Securities

NAUGOVQ = 0.25*ABOPIMAG(-1) + 0.9985*NAUGOVQ(-1) (1848.55)

R? = 1.000 SEE = 0.089 DW = 0.514

F, BALANCE OF PAYMENTS DEFINITIONS (F.1) Merchandise Trade Balance

MERCHBAL = ABOPEXG - ABOPIMG

(F.2) Travel Balance

TRAVBAL = (RXTVSUM*PC63 - [RMIVSUM* (IFERSIMTR63*CPIIM) ]

(F.3) Transportation Balance

TRANSBAL = ABOPEXSTROT - ABOPIMSTROT

(F.4) Military Transactions, Net

MILTRANSNET = ABOPEXSTMSC - ABOPIMSDDE

(F.5) Investment Income Balance INVINCBAL = ABOPEXSFR + ABOPEXSYGFA + ABOPEXSYPFA + ABOPEXSYPDIPRE

- ABOPIMSFR - ABOPIMSYGFA - ABOPIMSYPFA - ABOPIMSYPDIPRE

(F.6) Balance on Other Services

OTHERBAL = (XMISDPC*PC63) - (MMISDPC*PC63)

-45-

F.7) Balance on Goods and Services G&SBAL = MERCHBAL + TRAVBAL + TRANSBAL + MILTRANSNET + INVINCBAL

+ OTHERBAL

(F.8) National Income Accounts Goods and Services Balance

NIAG&SBAL = G&SBAL - REUSDIN + REFDIN

(F.9) Unilateral Transfers, Net

UNILATNET = ABOPIMUTGPO + ABOPIMUTGGR + (ABOPIMUTPRDPC*PC63)

(F.10) Current Account Balance

CURRENTBAL = G&SBAL - UNILATNET

(F.11) Current Account Balance Excluding Retained Earnings

SCBCURBAL = CURRENTBAL - REUSDIN + REFDIN

(F12) U.S. Government Current Account Transactions

GOVPAYEXOG = ABOPIMUTGPO + ABOPIMUTGGR - MILTRANSNET

(F.13) Foreign Private Capital Flows

FORPRIVFLOWS = ABOPEXAUSS + ABOPEXAPNL + IFDI + ABOPEXERROR

+ ABOPEXAPUSGSNL

(F.14) U.S. Private Capital Flows

USPRIVFLOWS = ABOPIMACC + ABOPIMAPBL + ABOPIMAPBS + IUDI

(F.15) Private Capital Balance

PRIVCAPBAL = FORPRIVFLOWS - USPRIVFLOWS

-46-

(F.16) U.S. Government Capital Flows

USGOVIFLOWS = ABOPEXAGBL + ABOPEXAGUSGSNL - ABOPIMAG

(F.17) Capital Account Balance

CAPBAL = FORPRIVFLOWS + USGOVIFLOWS - USPRIVFLOWS

(F.18) Capital Account Balance Excludin Retained Earnings

SCBCAPBAL = CAPBAL - REFDIN + REUSDIN

(F.19) Balance of Payments on Liquidity Basis

BOPLIQ = CURRENTBAL + CAPBAL

(F.20) Net Liquidity Balance

BOPNETLIQ = BOPLIQ + ABOPIMAPSLD - ABOPEXAGBL - ABOPEXAGUSGSNL

+ ABOPEXRSDRA

(F.21) Official Transactions Balance BOPOFFTRANS = BOPLIQ + ABOPEXAPSLD - ABOPEXAGBL - ABOPEXAGUSGSNL

+ ABOPEXRSDRA

II.

(1.)

(2.)

(3.)

(4.)

(5.)

(6.)

(7.)

(8.)

(9.)

-47-

DEFINITIONS OF COMPOSITE VARIABLES ABOPEXAPNL = ABOPEXAPNBSNL + ABOPEXAPBLNL + ABOPEXAPNBLNL

Flow of Nonliquid Liabilities to Private Foreigners Other than Direct Investments and Securities

ABOPEX = EXG63 *PEXG63

Value of Exports

ABOPEXSFR = ABOPEXSFRDI + ABOPEXSFRUF

Receipts of Fees and Royalties

ABOPEXSYPDIPRE = ABOPEXSYPDI + REUSDIN

Receipts of Direct Investment Interest, Dividends, Branch Earnings and Reinvested Earnings

ABOPIMACC = ABOPIMAPFS + ABOPIMAPNBL + ABOPIMAPNBS

Flow of Foreign Securities and Claims by U.S. Nonbanking Concerns

ABOPIMAPSLD = ABOPIMAPBSLD + ABOPIMAPNBSLD

Flow of Short-Term Liquid Claims Reported by U.S. Banks

ABOPIMG = IMG63*PIMG63

Value of Imports

ABOPIMSFR = ABOPIMSFRDI + ABOPIMSFRUF

Payments of Fees and Royalties

ABOPIMSYPDIPRE = ABOPIMSYPDI + REFDIN

Payments of Direct Investment Interest, Dividends, Branch Earnings and Reinvested Earnings

~48-

(10.) ABOPIMUTPRDPC = ABOPIMUTPR/PC63

Real Private Remittances and Transfers

(11.) CONF63 = [ (GNPD63CA*0.9272)**0.819] *[ (GNPD63JA*0.002763) **0.076]*[ (GNPD63UK*2.7997)**0.047 | *[ (GNPD63WG*0.2509)**0.058] Real Foreign Gross National Product Weighted by Travel Export Shares (12.) CPIEX = (CPI63FR**0.022)*(CPI631IT**0.,016)*(CPI63ME**0. 340) *[ (GNPDCA/GNPD63CA) **0.509]*[ (GNPDJA/GNPD63JA)**0.047] *[ (GNPDUK/GNPD63UK) **0.029]*[ (GNPDWG/GNPD63WG) **0.036] Foreign Consumer Price Index Weighted by Travel Export Shares, 1963 = 1.0 (13.) CPIIM = (CPI63FR**0,065)*(CPI631T**0,075)* (CPI63ME*%0, 285) *[ (GNPDCA/GNPD63CA) **0.405 ]*[ (GNPDJA/GNPD63JA) **0 .032]} *[ (GNPDUK/GNPD63UK)**0 .088]*[ (GNPDWG/GNPD63WG) **0 .050] Foreign Consumer Price Index Weighted by Travel Import Shares, 1963 = 1.0 (14.) FGNPUM = (GNPDCA**0 .568)* (GNPDJA**0 027) * (GNPDUK**0.273) * (CNPDWG**0 , 132) * (FERSCA**0 , 568) * (FERS JA**0 027) * (FERSUK**0 , 273) * (FERSWG**0 . 132)

Foreign Gross National Product Weighted by Share of U.S. Manufacturing Direct Investment Stock

-49-

(15.) FYDVD63 = [ (GNPD63CA*0. 927208) **0.513] *[ GNPD63UK*2,79966)**0.146]*[ (GNPD63.JA*0.00276329)**0, 202 *[ (GNPD63WG*0. 250921) **0.138]

Real Foreign Gross National Product Weighted by Export Shares

(16.) GUS = (0.4*[GNP - GNP(-1)] + 0.3[GNP(-1) - GNP(-2)] + 0,2*[GNP(-2) - GNP(-3)] + 0.1*[GNP(-3) - GNP(-4)])/([GNP + GNP(-3)]*0.5)

Normal Rate of Growth of the U.S. Gross National Product

(17.) IFDI = ABOPEXADI + REFDIN Foreign Direct Investment in the U.S. Including Retained Earnings

(18.) IFERSEXTR63 = [ (FERSCA**0 .509) * (FERSFR**0 ,022) *(FERSIT**0.016) * (FERS JA**0 047) * (FERSME**0 . 340) * (FERSUK**0 .029) * (FERSWG**0 036) ]/0.264045 Foreign Exchange Rate Index Weighted by Travel Export Shares, 1963 = 1.0

(19.) IFERSIMTR63 = [ (FERSCA**0.405 )*(FERSME**0 . 285 )* (FERSUK**0.088) * (FERSFR**0 .065) * (FERSIT**0 075) * (FERSWG**0 .049) * (FERS JA**0 .032)]/0.222773 Foreign Exchange Rate Index Weighted by Travel Import Shares, 1963 = 1.0

(20.) IFERSEX63 = [ (FERSBL**0 042) *(FERSCA**0. 373) *(FERSFR**0.057) * (FERSWG**0 , 100) * (FERS IT**0 .060) * (FERS JA**0.147) * (FERSNE**0 067) * (FERSSD**0 .022) * (FERSSZ**0 026) * (FERSUK**0,106) ]/0.178314

Foreign Exchange Rate Index Weighted by Export Shares, 1963 = 1.0

(21.)

(22.)

(23.)

(24.)

(25.)

(26.)

(27.)

(28.)

-50—

IFERSIM63 = [ (FERSBL**0.038)* (FERSCA** 0.399) * (FERSFR**0 .042) * (FERSWG**0.. 117) * (FERSIT**0.050)* (FERS JA**0. 189) * (FERSNE**0 021) * (FERSSD**0 .018) * (FERSSZ**0.021) - %* (FERSUK**0. 106) ]/0.161950 Foreign Exchange Rate Index Weighted by Import Shares, 1963 = 1.0 IUDI = ABOPIMAPDI + REUSDIN U.S. Direct Investment Abroad Including Retained Earnings MMISDPC = (ABOPIMSGS + ABOPIMSPS)/PC63

Real Miscellaneous Services Imports

NAFGFQ = NAFNLIQQ + (0.075*NAFLIQNOFQ) + (0.612*NAFLIQOFQ)

Value of U.S. Government Liabilities Abroad

NAFLPRQ = NAFCSQ + NAFPNLQ Value of U.S. Corporate Securities and Other U.S. Private Nonliquid Liabilities Held by Foreigners NAFPFQ = NAFLPRQ + NAFBLOFFQ + (0.335*NAFLIQNOFQ) + (0.255*NAFLIQOFQ)

Value of U.S. Private Liabilities to Foreigners Except Direct Investment

NAFPNLQ = NAFNBSQ + NAFNBLQ + NAFBLQ - NAFBLOFFQ

Value of Nonliquid Liabilities to Private Foreigners Other than Direct Investments and Securities

NAUCC = NAUFSQ + NAUNBLQ + NAUNBSQ

Value of Foreign Securities and Claims by U.S. Nonbanking Concerns

-51-

(29.) NAUPFQ = NAUCC + NAUBLQ + NAUBSQ Value of Foreign Claims Except Direct Investment Held by Private U.S. Residents

(30.) PQA = FGNPUM/[RMMBCIND*(1.0 - RTCGFS) + 10.0 - [(PGNP63 - PGNP63(-4))/PGNP63(-4)]*100.0]

_ Desired Stock of U.S. Direct Investment

(31.) RMFLDI = (RMLCAIBQ**0,533)* (RMLBLQ**0.023) *(RMLFRCBQ**0.052) * (RMLITQ**0 . 032) * (RMLJAQ**0 .025 ) * (RMLNBQ**0 , 025 ) * (RMLSDILQ**0 .011) * (RMLSZQ**0 .034) * (RMLUKQ**0. 176) * (RMLWGIBQ**0 .088) Foreign Long-Term Interest Rate Weighted by Direct Investment Shares . (32.) RMFSBL = (RMSBLQ**0.022)*(RMSFRQ**0 073) *(RMSWGQ**0. 161) * (RMLITQ**0 .069) * (RMSNETBQ**0 .022) * (RMLSDILQ**0 .027) * (RMSSZQ**0 .080) * (RMSUKQ**0 , 218) * (RMSCAQ**0, 168) * (RMS JAQ**0 . 160) Foreign Short-Term Interest Rate Weighted by Short-Term Assets (33.) RMIVSUM = (ABOPIMSTRPF + ABOPIMSTVL) / (IFERSIMTR63*CPIIM)

Real Travel and Passenger Fare Imports

(34.) RPCFUS = (IFERSIMIR63*CPIIM)/PC63 Relative Consumer Prices - Travel Imports (35.) RPC63 = PC63/ (IFERSEXTR63*CPIEX)

Relative Consumer Prices - Travel Exports

-52-

(36.) RXTVSUM = (ABOPEXSTRPF + ABOPEXSTVL) /PC63

Real Travel and Passenger Fare Exports

(37.) WCONF63 = 0,1917*CONF63 + 0.1725*CONF63(-1) + 0.1553*CONF63 (-2) + 0.1397*CONF63(-3) + 0.1258*CONF63(-4) + 0.1132*CONF63(-5) + 0.1018*CONF63 (-6)

Foreign Wealth Weighted by Share of Travel Spending

(38.) WLTHCNP = 0.1259*GNP + 0,1134*GNP(-1) + 0.1020(-2) + 0.0918*GNP (-3) + 0.0826*GNP(-4) + 0.0744*GNP(-5) + 0.0669*GNP(-6) + 0.0602*GNP(-7) + 0.0542*GNP(-8) + 0.0488*GNP(-9) + 0.0439*GNP(-10) + 0.0395*GNP(-11) + 0.0356*GNP(-12) + 0.0320*GNP(-13) + 0.0288*GNP(-14)

U.S. Wealth Measured by U.S. GNP

(39.) WPIFEX63 = (WPIBL**0,042)* (WPICA**0.373) *(WPIFR**0.057) * (WPIWG**0. 100) * (WPIIT**0 .060)* (WPIJA**0.147) * (WPINE**0 ,067)* (WPISD**0 .022)* (WPISZ**0 .026) * (WPIUK**0,106) Foreign Wholesale Price Index Weighted by Export Shares, 1963 = 1.0 (40.) WPIFMIFERIM = [ (WPIBL**0.038)*(WPICA**0.399)* (WPIFR**0.042) * (WPIWG**0.117)* (WPIIT**0.050) *(WPIJA**0. 189) * (WPINE**0.021) * (WPISD**0.018) *(WPISZ**0 021) * (WPIUK**0.106) ]*IFERSIM63

Foreign Wholesale Price Index Weighted by Import Shares; Adjusted by Exchange Rate Index, 1963 = 1.0

(41.)

(42.)

(43.)

(44.)

(45.)

(46.)

-53-

WPIFTARF = (IFERSEX63*WPIFEX63) /[ PEXG63*(1.0 + WTARF) ]

Tariff Adjusted Relative Prices - Exports

WPI63TAR = WP163/[PIMG63*(1.0 + RDUTYIMUS) ]

Tariff Adjusted Relative Prices - Imports

WTARF = (RDUTYIMCA**0.513)* (RDUTYIMWG**0. 138) * (RDUTYIMUK**0. 146) * (RDUTYIMJA**0, 202) Foreign Tariff Rates Weighted by Export Shares

WYD63 = 0.1259*YD63 + 0.1134*YD63(-1) + 0.1020*YD63(-2) + 0.0918*YD63(-3) + 0.0826*YD63(-4) + 0.0744*YD(-5) + 0.0669*YD63(-6) + 0.0602*YD63(-7) + 0.0542*YD63(-8) + 0,0488*YD63(-9) + 0.0439*YD63(-10) + 0.0395*YD63 (-11) + 0.0356*YD63(-12) + 0.032*YD63(-13) + 0.0288*YD63(-14)

U.S. Wealth Measured by Disposable Income

XMISDPC = (ABOPEXSGS + ABOPEXSPS) /PC63

Real Miscellaneous Services Exports

YD63 = YD/PC63

U.S. Real Disposable Income

III. VARIABLE

ABBREVIATIONS

S.C.B.

ABOPEXADI

ABOPEXAGBL

ABOPEXAGSLD

-54- DEFINITIONS AND SOURCES

Annual Rate

Billions of Current U.S. Dollars Beginning of Period

Percent per Annum

Seasonally Adjusted

Bureau of Labor Statistics, U.S, Department of Labor

Balance of Payments Data Resources, Incorporated

International Finance Statistics, International Monetary Fund

Main Economics Indicators, Organization for Economic Co-operation and Development

Survey of Current Business, U.S, Department of Commerce

Foreign Capital Inflows: Direct Investment Flow Excluding Retained Earnings in the U.S., b.c.d., a.r., Source: S.C,B., B.0O.P. Table 2, line 48 (49 after December 1972).

Foreign Capital Inflows: Other Readily Marketable to Foreign Official Agencies Reported by U.S., Banks, b.c.d., a.r., Source: S.C.B., B.0.P.

Table 2, line 53(56).

Foreign Capital Inflows: U.S. Liquid Liabilities to Foreign Official Agencies, b.c.d., a.r., Source: S.C.B., B.0O.P. Table 2, line 57 (55).

ABOPEXAGUSGSNL

ABOPEXAPBLNL

ABOPEXAPNBLNL

ABOPEXAPNBSNL

ABOPEXAPSLD

ABOPEXAPUSGSNL

ABOPEXAUSS

ABOPEXERROR

ABOPEXG

ABOPEXRSDRA

ABOPEXSFRDI

-55-

Foreign Capital Inflows: Nonliquid Liabilities Reported by U.S, Government to Foreign Official Reserve Agencies, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 54 (57).

Foreign Capital Inflows: Long-Term Nonliquid Liabilities to Private Foreigners, Reported by U.S. Banks, b.c.d., a.r., Source: S,C.B., B.O.P. Table 2, line 53 (53).

Foreign Capital Inflows: Long-Term Nonliquid Liabilities to Private Foreigners, Reported by U.S. Nonbanks (Other than Direct Investment and Securities), b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 50 (51).

Foreign Capital Inflows: Short-Term Nonliquid Liabilities to Private Foreigners, Reported

by U.S, Nonbanks (Other than Direct Investment or Securities), b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 51 (52).

Foreign Capital Inflows: U.S. Liquid Liabilities to Private Foreigners, b.c.d., a.r., Source: S.C.B., B.O.P, Table 2, line 56 (54).

Foreign Capital Inflows: Nonliquid Liabilities of U.S, Government to Other Official and Private Foreigners, b.c.d., a.r., Source: S.C.B., B.0.P. Table 2, line 55 (48).

Foreign Capital Inflows: U.S. Corporate Securities Other than Treasury Issues, b.c.d., a.r., Source: S,C.B., B.O.P. Table 2, line 49 (50).

Net Errors and Omissions, b.c.d., a.r., Source: S§.C.B., B.O.P. Table 2, line 64.

Exports of Goods and Services: Merchandise, Adjusted, Excluding Military Transfers, b.c.d., a.r., Source: S.C.B., B.O.P, Table 2, line 2.

Allocations of Special Drawing Rights (SDR) b.c.d., a.r., Source; S.C,B., B.O.P. Table 2, line 63.

Exports of Goods and Services: Receipts of Direct Investment Fees and Royalties, b.c.d., a.r., Source: S,C,.B., B.0O.P, Table 2, line 10.

ABOPEXSFRUF

ABOPEXSGS

ABOPEXSPS

ABOPEXS TMSC

ABOPEXS TROT

ABOPEXS TRPF

ABOPEXSTVL

ABOPEXSYGFA

ABOPEXSY PDI

ABOPEXSYPFA

ABOPIMAG

ABOPIMAPBL

ABOPIMAPBS

-56—

Exports of Goods and Services: Fees and Royalties from Unaffiliated Foreigners, b.c.d., a.r., Source: §.C,B., B.0.P. Table 2, line 7.

Exports of Goods and Services: U.S. Government Miscellaneous Services, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 9.

Exports of Goods and Services: Other Private Services, b.c.d., a.r., Source: S.C,.B., B.O.P. Table 2, line 8.

Exports of Goods and Services: Transfers Under U.S, Military Agency Sales Contracts b.c.d., a.r., Source: S,C,B., B.O.P. Table 2, line 3.

Exports of Goods and Services: Other Transportation, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 6.

Exports of Goods and Services: Passenger Fares, b.c.d., a.r., Source: S,C,B., B.0O.P. Table 2, line 5.

Exports of Goods and Services: Travel Spending, b.c.d., a.r., Source: S.C,B., B.O.P, Table 2, line 4,

Exports of Goods and Services: Receipts of Income from U.S. Government Assets, b.c.d., a.r., Source: S,C,B., B.O.P. Table 2, line 13.

Exports of Goods and Services: Receipts of

Income from Direct Investment Interest, Dividends and Branch Earnings, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 11.

Exports of Goods and Services: Receipts of Income from Non-Direct Private Assets, b.c.d., a.r., Source: S,C,B., B.0.P. Table 2, line 12.

U.S. Government Capital Flows, Net, b.c.d., a.r., Source: S,C,B., B.O.P, Table 2, line 33.

U.S, Private Capital Outflows: Long-Term Claims Reported by U.S, Banks, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 41.

U.S. Private Capital Outflows: Short-Term Claims Reported by U.S. Banks, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, lines 42 & 43.

ABOPIMAPBSLD

ABOPIMAPDI

ABOPIMAPFS

ABOPIMAPNBL

ABOPIMAPNBS

ABOPIMAPNBSLD

ABOPIMG

ABOPIMSDDE

ABOPIMSFRDI

ABOPIMSFRUF

ABOPIMSGS

ABOPIMSPS

-57-

U.S. Private Capital Outflows: Liquid Short-Term Claims Reported by U.S, Banks, b.c.d., a.r., Source: S.C.B., B.0.P. Table 2, line 43.

U.S. Private Capital Outflows: Direct Investment Flow Excluding Retained Earnings Abroad, b.c.d. a.r., Source: S.C,B., B.O.P. Table 2, line 39.

U.S. Private Capital Outflows: Foreign Securities, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 40.

U.S. Private Capital Outflows: Long-Term Claims Reported by U.S. Nonbanking Concerns, b.c.d., a.r., Source: S.C,B., B.O.P. Table 2, line 44,

U.S. Private Capital Outflows: Short-Term Claims Reported by U.S. Nonbanking Concerns, b.c.d., a.r., Source: S.C,B., B.O.P. Table 2, line 45 & 46.

U.S. Private Capital Outflows: Short-Term Liquid Claims Reported by U.S. Nonbanking Concerns, b.c.d., a.r., Source: S.C,B., B.0.P. Table 2, line 46.

Imports of Goods and Services: Merchandise, Adjusted, Excluding Military Transfers, b.c.d., a.r., Source: S.C,B., B.0.P. Table 2, line 16.

Imports of Goods and Services: Direct Defense Expenditures, b.c.d., a.Yr., Source: S.C.B., B.O.P. Table 2, line 17.

Imports of Goods and Services: Payments of Income on Direct Investment Fees and Royalties, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 24.

Imports of Goods and Services: Fees and Royalties to Unaffiliated Foreigners, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 21.

Imports of Goods and Services: U.S. Government Payments for Miscellaneous Services, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 23.

Imports of Goods and Services: Private Payments for Other Services, b.c.d., a.r., Source: S,C,B., B.O.P. Table 2, line 22.

ABOPIMSTROT

ABOPIMSTRPF

ABOPIMSTVL

ABOPIMSYGFA

ABOPIMSYPDI

ABOPIMSY PFA

ABOPIMUTGGR

ABOPIMUTGPO

ABOPIMUTPR

ACBLI

CCACORP

CPI63FR

CPI631T

-58-

Imports of Goods and Services: Other Transportation, b.c.d., a.r., Source: S,.C.B., B.O.P. Table 2, line 20.

Imports of Goods and Services: Passenger Fares, b.c.d., a.r., Source: S.C.B., B.0O.P. Table 2, line 19.

Imports of Goods and Services: Travel Spending Abroad, b.c.d.,a.r., Source: S,C,B., B.O.P. Table 2, line 18.

Imports of Goods and Services: Payments of Income of U.S. Government Liabilities, b.c.d., a.r., Source: S.C,B., B.O.P. Table 2, line 27.

Imports of Goods and Services: Payments of Income on Direct Investment Interest, Dividends and Branch Earnings, b.c.d., a.r., Source: S.C,B., B.O.P. Table 2, line 25.

Imports of Goods and Services: Payments of Income on Other Private Liabilities, b.c.d., a.r., Source: S,C,B., B.O.P. Table 2, line 26,

Unilateral Transfers, Net: U.S, Government Grants (Excluding Military Grants), b.c.d., a.r., Source: S.C,B., B.O.P. Table 2, line 30.

Unilateral Transfer, Net: U.S. Government Pensions and Other Transfers, b.c.d., a.r., Source: S,C.B., B.O.P. Table 2, line 31.

Unilater Transfers, Net: Private Remittances and Other Transfers, b.c.d., a.r., Source: S.C.B., B.O.P. Table 2, line 32,

Loans and Investments, all Commercial Banks, b.c.d., end of period, Source: Federal Reserve Bulletin, A-17.

Corporate Capital Consumption Allowances, b.c.d., a.r., S.a., Source: S.C.B.

Consumer Price Index: France, 1963 = 1.0, Source: Business Conditions Digest.

Consumer Price Index: Italy, 1973 = 1.0, Source: Business Conditions Digest.

CPI63ME

DIV

DMYCD

DMYEXP067

DMYEXPO70

DMYFDIPA

DMYILST

DMYJAPWD

DMYMEC PR

DMYMIPTD

DMYNEP

DMYSP

DMYSUEZ

~59-

Consumer Price Index: Mexico, 1963 = 1.0, Source: I.F.S.

Corporate Dividends, b.c.d., a.r., s.a., Source: S.C.B.

Dummy Variable for Gap Between Maximum and actual Rate for Large Certificates of Deposits, 1.0 from 68:1 to 70:2.

Dummy Variable for Expo67, 1.0 in 1967:2 and 2.0 in 1967:3.

Dummy Variable for Expo70, 1.0 in 1970:2 and 2.0 in 1970:3.

Dummy Variable for Foreign Direct Investment Program (U.S. Exempted Canada from Controls in 68:2), 1.0 from 68:2 to 69:1.

Dummy Variable for International Longshoremen's Strikes, 1.0 in 62:4, 64:4, 68:4, 71:4; 2.0 in 63:1, 65:1, 69:1.

Dummy Variable for Window-Dressing Effect of Banks' Nonliquid Claims on Japan,

1.0 in 70:4 and -1.0 in 71:1, Source: S.C.B., 6/71, pp. 48 & 59.

Dummy Variable for Private Remittances During Middle-East Crisis, 1.0 in 1967:3 and 2.0 in 1967:2.

Dummy Variable for Maximum Interest Payable on Official Foreign Time Deposits in the U.S., 1.0 until 62:3, Source: Federal Reserve Bulletin, A-10,

Dummy Variable Representing Uncertainty at the Time of New Economic Policy, 1.0 from 71:3 to 71:4,

Dummy Variable to Account for Speculative Capital Flows in 1971, 1.0 for 71:3 and 71:4.

Dummy Variable for Suez Canal Crisis, 1.0 from 67:2 to 67:3.

DMYWD

DMY621V

DMY6311 DMY631V DMY6411

DMY641V

DMY651

DMY661II

DMY671V

DMY681II

DMY681V

DMY691T

DMY691V

-60-

Window-Dressing Dummy Variable for Foreign Direct Investment Program, 1.0

in 4th Quarters from 68:4, Source: S.C.B., B.O.P, Table 2, line 48.

Dummy Variable for One-Shot Effect of Elimination of Maximum Interest Payable

on Time Deposits of Official Foreigners, 1.0 in 62:4, Continuing Effects Represented by DMYMIPTD.

Dummy Variable for the Anticipation of the Interest Equilization Tax, 1.0 in 63:2.

Dummy Variable for the Initial Impact of Interest Equalization Tax, 1.0 in 63:4.

Dummy Variable for Financial Tightness Abroad, 1,0 in 64:2.

Dummy Variable for the Anticipation of the Voluntary Foreign Credit Restraint Program, 1.0 in 64:4.

Dummy Variable for the Anticipation of the Voluntary Foreign Credit Restraint Program, 1.0 in 65:1.

Dummy Variable for the Liquidation in U.S, of an Oil Company Owned in Canada, 1.0 in 66:3, Source: $.C.B., 9/67

pp. 50 & 51, 6/67 pp. 40 & 41.

Dummy Variable for the United Kingdom Devaluation (11/18/67), 1.0 in 67:4, Source: I.F.S.

Dummy Variable for Capital Flow into Canada (Exempted from Foreign Direct Investment Program), 1.0 in 68:2.

Dummy Variable for Unusual Capital Outflow from Japan, 1.0 in 68:4.

Dummy Variable for Unusual Capital Outflow from Japan, 1.0 in 69:2, Source: Herring.

Dummy Variable for the West German Revaluation (10/26/69), 1.0 in 69:4, Source: I.F.S. ,

DMY701II

DMY7111

_ FERSBL FERSCA FERSFR FERSIT FERSJA FERSME FERSNE FERSSD FERSSZ

FERSUK

FERSWG

GNP

GNPDCA

-61-

Dummy Variable for Financial Tightness Abroad, 1.0 in 70:2, Source: S.C.B., 9/20 p. 27.

Dummy Variable for Expectation of U.S. Devaluation, 1.0 in 71:2, Source: S,C.B., 10/27 p.22.

Spot Exchange Rate: Belgium, U.S. S$ per Belgium Franc, Source: I,F.S.

Spot Exchange Rate: Canada, U.S. $ per Canadian Dollar, Source: Bank of Canada Review.

Spot Exchange Rate: France, U.S. $ per Franc, Source: I,F.S.

Spot Exchange Rate: Italy, U.S. $ per Lire, Source: I.F.S.

Spot Exchange Rate: Japan, U.S. $ per Yen, Source: I.F.S.

Spot Exchange Rate: Mexico, U.S. $ per Peso, Source: I.F.5S.

Spot Exchange Rate: Netherlands, U.S. $ per Guilder, Source: I,F,S.

Spot Exchange Rate: Sweden, U.S. $ per Kroner, Source: I.F.S.

Spot Exchange Rate: Switzerland, U.S. $ per Swiss Franc, Source: I.F.S.

Spot Exchange Rate: United Kingdom, U.S. $ per Pound Sterling, Source: U.K., Financial Statistics.

Spot Exchange Rate: West Germany,U.S. $ per Deutsche Mark, Source: I,F.S.

U.S. Gross National Product, b.c.d., a.r., s.a., Source: S.C.B.

Gross National Product: Canada, Billions of Canadian Dollars, a.r., Source: Canada, National

Income and Expenditure Accounts.

GNPDJA

GNPDUK

GNPDWG

GNPD63CA

GNPD63JA

GNPD63UK

GNPD63WG

IET63

NAFBLOFFQ

NAFBLQ

NAFCSQ

NAFDINQ

-62-

Gross National Product: Japan, Billions of Yen, a.r., Source: Japan, Economic Planning Agency, Annual Report and Bank of Japan, Economic

Statistics Monthly.

Griss National Product: United Kingdom, Billions of Pounds Sterling, a.r., Source: U.K., Economic Trends.

Gross National Product: West Germany, Billions of Deutsche Marks, a.r., Source: West Germany,

Vierteljahrsheft zur Wirtschaftsforschung.

Gross National Product: Canada, Billions of 1963 Canadian Dollars, a.r., Source: Canada,

National Income and Expenditure Accounts.

Gross National Product: Japan, Billions of 1963 Yen, a.r., Source: Japan, Economic Planning Agency, Annual Report and Bank of Japan, Economic Statistics Monthly.

Gross National Product: United Kingdom, Billions of 1963 Pounds Sterling, a.r., Source: U.K., Economic Trends.

Gross National Product: West Germany, Billions of 1963 Deutsche Marks, a.r., Source: West

Germany, Vierteljahrsheft zur Wirtschaftsforschung.

Dummy Variable for Interest Equalization Tax, 1.0 from 1963:3 to 71:4.

Value of Short-Term Liabilities to Foreign Official Agencies Reported by U.S. Banks, b.c.d., b.p., Source: Treasury Bulletin and Estimates.

Value of Long-Term Liabilities to Foreigners Reported by U.S. Banks, b.c.d., b.p., Source: Treasury Bulletin and Estimates.

Value of U.S. Corporate Securities Held by Foreigners, b.d.c., b.p., Source: S.C.B. and Estimates.

Value of Direct Investment in U.S. by Foreign Firms, b.c.d., b.p., Source: S.C.B. and Estimates

NAFLIQNOFQ

NAFLIQOFQ

NAFNBLQ

NAFNBSQ

NAFNLIQPQ

NAFNLIQQ

NAUBLQ

NAUBSQ

NAUDINQ

NAUFSQ

NAUGOVQ

NAUNBLQ

NAUNBSQ

-63-

Value of Liquid Liabilities to Private Foreigners, b.c.d., b.p., Source: Federal Reserve Bulletin, and Estimates,

Value of Liquid Liabilities to Official Foreigners, b.c.d., b.p., Source: Federal Reserve Bulletin, and Estimates.

Value of Long-Term Nonbanking Liabilities to Foreigners, b.c.d., b.p., Source: S.C.B. and Estimates,

Value of Short-Term Nonbanking Liabilities to Foreigners, b.c.d., b.p., Source: S.C.B.,

Treasury Bulletin, and Estimates.

Value of Nonliquid Liabilities to Other Official and Private Foreigners Reported by the U.S. Government, b.c.d., b.p., Source: S.C.B. and Estimates,

Value of Nonliquid Liabilities to Foreigners by the U.S. Government, b.c.d., b.p., Source: S.C.B. and Estimates.

Value of Long-Term Foreign Claims Reported by U.S. Banks., b.c.d., b.p., Source: Treasury Bulletin and Estimates,

Value of Short-Term Foreign Claims Reported by U.S. Banks, b.c.d., b.p., Source: S.C.B. and Estimates,

Value of U.S, Direct Investments Abroad, b.c.d., b.p., Source: S.C.B, and Estimates,

Value of U.S. Held Foreign Securities, b.c.d., b.p., Source: S,C.B. and Estimates.

Value of U.S. Government Held Foreign Securities, b.c.d., b.p., Source: S.C.B. and Estimates.

Value of Long-Term Foreign Claims Reported by U.S. Nonbanks, b.c.d., b.p., Source: and Estimates,

S.C,.B.

Value of Short-Term Foreign Claims Reported by U.S. Nonbanks, b.c.d., b.p., Source: S.C.B.,

Treasury Bulletin and Estimates,

PC63

PGNP63

PIMG63

PXEAF63

Ql Q2 Q3

RDUTYIMCA

RDUTYIMJA

RDUTYIMUK

RDUTYIMUS

RDUTY IMWG

REFDIN

REUSDIN

RIET

RMCDLM

-~64-

U.S. Implicit Price Deflator for Personal Consumption Expenditures, 1963 = 1.0, s.a., Source: S.C.B.

Implicit Price Deflator for Gross National Product, 1963 = 1.0, s.a., Source: S.C.B.

Unit Value Index of Imports of Merchandise, 1963 = 1.0, Source: S.C.B.

U.S. Price of Gross Product (Nonfarm Industries), 1963 = 1.0, “p.a., s.a., Source: D.R.I., B.E.A.

Seasonal Dummy Variable, 1.0 in First Quarters. Seasonal Dummy Variable, 1.0 in Second Quarters. Seasonal Dummy Variable, 1.0 in Third Quarters.

Ratio of Duty Collected to Total Imports: Canada, Source: Canadian Statistical Review and Estimates.

Ratio of Duty Collected to Total Imports: Japan, Source: Japan, Economic Statistics Annual 1970

and Economic Statistics Monthly and Estimates.

Ratio of Duty Collected to Total Imports: United

Kingdom, Source: U.K., Monthly Digest of Statistics and Estimates.

Ratio of Duty Collected to Total Imports: United States, Source: U.S. Statistical Abstract, and FT990 and Estimates.

Ratio of Duty Collected to Total Imports, West

Germany, Source: Monthly Report of the Duetsche Bundesbank and Estimates.

Retained Earnings of Foreign Investment in the U.S., b.c.d., a.r., Source: S.C.B. and Estimates.

Retained Earnings of U.S. Direct Investments Abroad, b.c.d., a.r., Source: S.C.B. and Estimates

Rate of Interest Equalization Tax, Source: Estimates. Maximum Interest Rate Payable on Large Certificates

of Deposit, “p.a., Weighted Average, Source: D.R.I., Federal Reserve Bulletin, A-10.

RMGBS

RMLBLQ

RMLCAIBQ

RMLFRCBQ

RMLITQ

RMLJAQ

RMLNEQ

RMLSDILQ

RMLSZQ

RMLUKQ

RMLWGIBQ

RMMBCIND

RMSBLQ

RMSCAQ

~65-

Average Market Yield on Three-Month U.S. Treasury Bills, %p.a., Average of Daily Closing Bid Prices, Source: D.R.I., B.E.A.

Government Bond Yield: Belgium, %p.a., Source: Bulletin de la Banque Nationale de Belgique.

Industrial Bond Yield: Canada, %p.a., Source: Bank of Canada Review.

Corporate Bond Yield: France, %p.a., Source: France, Bulletin Mensuel de Statistique.

Industrial Bond Yield: Italy, Z%p.a., Source: Banca d'Italia, Bollettino,

Industrial Bond Yield: Japan, %p.a., Source: Economic Statistics of Japan.

Government Bond Yield: Netherlands, %p.a., Source: Netherlands Bank and Central Bureau of Statistics, Maandstatistiek Van Het Financiewezen.

Industrial Loans Yield, Sweden, Zp.a., Source:

Skandinaviska Banken Quarterly Review.

Swiss Confederation Bond Yield, Zp.a., Source: Switzerland, National Bank, Monatsbencht Bulletin Mensuel,

3 1/2% War Loan Rate: United Kingdom, Z%p.a., Source: U.K., Financial Statistics,

Industrial Bonds Yield (Yields on Bonds Outstanding): West German, Zp.a., Source: Monthly Report of the Deutsche Bundesbank,

Yield on Moody's Corporate Bonds (Industrials), %p.a., Average of Daily Figures, Source: Federal Reserve Bulletin, D.R.I.

Yield on Three Month Treasury Certificates:

Belgium, %p.a., Source: Bulletin de la Banque Nationale de Belgique.

Three Month Treasury Bill Rate: Canada, %p.a., Source: Bank of Canada Review.

RMSEUROQ

RMSFRQ

RMS JAQ

RMSNETBQ

RMSSZQ

RMSUKQ

RMSWGQ

RM1

RTCGFS

RU

TBEURO

VCFR

WPIBL

WPICA

WPIFR

-66-

Rate on Three Month Euro-Dollar Deposits in London, %p.a., Source: U.K., Financial Statistics.

Day to Day Money Rate: France, %p.a., Source: France, Bulletin Mensuel de Statistique.

Loans and Discount Rate (all Banks): Japan, Z%p.a., Source: Economic Statistics of Japan.

Rate on Three Month Treasury Papers: Netherlands, %peae, Source: Amsterdam-Rotterdam Bank, Quarterly Review.

Three Month Bank Time Deposit Rate: Switzerland, 7p.a., Source: Switzerland National Bank, Monatsbencht Bulletin Mensuel.

Treasury Bill Rate: United Kingdom. %p.a., Source: U.K., Financial Statistics.

Three Month Loan Rate: West Germany, Z%p.a., Source: Monthly Report of the Deutsche Bundesbank,

Prime Rate on U.S. Short-Term Business Loans, Z%pea., Source: D.R.I., B.E.A.

Statutory Corporate Tax Rate, Source: D.R.I.

U.S. Unemployment Rate for all Civilian Workers, %p.a., S.a., Source: D.R.1I., B,L,S,

U.S. Treasury Certificates, Euro-Dollar Series

and Special Export-Import Bank Securities Held

by Foreign Branches of U.S. Banks, b.c.d., only 71:1 to 71:4, Source: Federal Reserve Bulletin, A-90.

Dumny Variable for Voluntary Foreign Credit Restraint Program, 10. from 1965:1 to 71:4.

Wholesale Price Index (Manufactured Goods): Belgium, 1963 = 1.0, Source: M.E.1.

Wholesale Price Index (Manufactured Goods): Canada, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Intermediate Goods): France, 1963 = 1.0 Source: M.E.I.

WPILIT

WPIJA

WPINE

WPISD

WPISZ

WPIUK

WPIWG

WPI63

ZA

-67-

Wholesale Price Index (Consumer Goods): Italy, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Manufactured Consumer Goods): Japan, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Manufactured Goods): Netherlands, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Manufactured Goods): Sweden, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (All Items): Switzerland, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Manufactured Goods for the Home Market): United Kingdom, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (Consumer Goods): West Germany, 1963 = 1.0, Source: M.E.I.

Wholesale Price Index (All Commodities): United States, 1963 = 1.0, s.a., Source: S.C.B., D.R.I.

U.S. Personal Disposable Income, b.c.d., a.r., s.a., Source: D.R.I., B.E.A.

Corporate Profits After Tax Excluding IVA, b.c.d., @.%., S.a., Source: S.C.B., D.R.I.

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

- -68-

REFERENCES

Branson, William H., "Monetary Policy and the New View of Interna-

tional Capital Movement" Brookings Papers on Economics Activity, 1970: w, pp. 245-270.

» "The Trade Effects of the 1971 Currency Realign-

ment," Brooking Papers on Economic Activity, 1972: 1, pp. 15-58.

Branson, W.H. and A.K. Klevorick, "Money Illusion and the Aggregate Consumption Function" American Economic Review, 59 (December, 1969), pp. 832-843.

Clark, Peter B., "The Effects of Recent Exchange Rate Changes on the U.S. Trade Balance," unpublished manuscript, March, 1974.

Deppler, Michael C., "Some Evidence on Exchange Rate Effects," IMF DM/74/8, unpublished manuscript, January, 1974.

Dornbusch, Rudiger, "Currency Depreciation, Hoarding, and Relative

Prices," Journal of Political Economy, 81 (July/August, 1973), pp. 893-915.

Houthakker, H.S. and S.P. Magee, "Income and Price Elasticities in World Trade," Review of Economics and Statistics, V (May, 1969), pp. 11-125.

Johnson, Harry G., "Monetary Approach to Balance of Payments

Theory" in Further Essays in Monetary Economics (Cambridge: Harvard University Press, 1972), pp. 229-249.

Junz, Helen B. and R.R. Rhomberg, "Price Competitiveness in Export Trade among Industrial Countries" American Economic Review LXII (May, 1973), pp. 412-418.

» and B.B. Lowrey, "The Effects of Changes in Economic Activity on U.S. Trade Flows."" A paper presented at the American Economic Association Annual Meeting, December, 1973, in New York.

Kennen, Peter B., "A Simple Statistical Test for Early Effects of the U.S. Devaluation,'"' Research Memorandum, November, 1972.

Klein, Lawrence R., "Comment on W.H. Branson, "The Trade Effects of

the 1971 Currency Realignment ," Brookings Papers on Economic Activity, 1972: 1, pp. 59-65.

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Kwack, S.Y., "A Model of the United States International Transporation Account, 1960III-1967IV," Journal of International Economics, 1 (May, 1971), pp. 215-226.

» "The Structure of International Interest Rates: An Extension of Hendershott's Tests." Journal of Finance, XXVI (September, 1971), pp. 897-900.

» "The Determination of United States Imports and

Exports: A Disaggregated Quarterly Model, 1960IILI-1967IV,"

Southern Economic Journal, XXXVIII (January, 1972), pp. 302- 314.

» "Effects of Income and Prices on Travel Spending

Abroad, 1960III-1967IV,"" International Economic Review,

13 (June, 1972), pp. 245-256.

» "Effects of Interest Rates on Foreign Investment In-

come,'' The Quarterly Review of Economic & Business, XII

(Spring, 1972), pp. 23-30.

» A Model of United States Direct Investment: A Neoclassical Approach," Western Economic Journal, X (December, 1972), pp. 376-383.

» "A Disaggregated Model of Financial Flows Between the

United States and Foreign Regions." Unpublished mimeograph,

1971.

» A Note on the Balance of Payments Effects of the U.S. Capital Controls Programs: Simulation Estimates," Journal of Finance, (June, 1974), forthcoming.

» "The Effects of Foreign Inflation on Domestic Prices and the Relative Advantage of Exchange Rate Changes," International Finance Discussion Paper No. 35, November, 1973, Board of Governors of the Federal Reserve System, Washington, D.C.

» and G.R. Schink, "A Disaggregated Quarterly Model of U.S. Trade and Capital Flows: Simlations and Tests of Policy Effectiveness," in Gary Fromm and L. Klein (eds.), The Brookings

Model: Perspective and Recent Development, North-Holland publishing Co. (1974), forthcoming.

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Laffer, Arthur A., "Do Devaluation Really Help Trade," Wall Street Journal, February 5, 1973, p. 10.

Machlup, R., W. Salant, and L. Tarshis (eds.), International Mobility and Movement of Capital. A Conference of the Universities National Bureau Committee for Economic Research, (New York: Columbia University Press, 1972).

Magee, Stephen P., "Currency Contracts, Pass-through, and Devalua-

tion," Brookings Papers on Economic Activity, 1973: 1, pp. 303-325.

, "Prices, Incomes, and Foreign Trade," A paper presented for the Conference on Research in International Trade and Finance, International Finance Division, Princeton University, March 30-31, 1973.

, "U.S. Merchandise Trade in 1970 and 1971," No. 10, Studies in International Business and Economics, University of California at Berkeley, September, 1971.

Miller, N.C. and M.v.N. Whitman, "A Mean-Variance Analysis of United States Long-Term Portfolio Foreign Investment,"

Quarterly Journal of Economics, LXXXIV (May, 1970), pp. 175-196.

Modigliani, F. and R. Sutch, "Innovation in Interest Policy," American Economic Review. Papers and Proceedings, LVI (May, 1966), pp. 178-197.

OASIA Research Technical Report, Users Manual for OASTA Research Balance of Payments Model, prepared by Data Resources, Inc. under contract with Office of the Assistant Secretary for International Affairs, U.S. Department of Treasury, 1973.

Rhomberg, R.R. and L. Boissonneault, "Effects of Income and Price Changes on the United States Balance of Payments," IMF Staff Papers, XI (March, 1964), pp. 59-124.

Shields, Roger and T.D. Willett, "Revaluation Can Be Inflationary: An Analysis of Demand Shifts in a Policy Dilemma Model," unpublished, 1971.

Stevens, Guy V.G., "Capital Mobility and the International Firm," in [22], pp. 323-354.

Willett, Thomas D. and F. Forte, "Interest Rate Policy and External

Balance," Quarterly Journal of Economics, LXXXIII (May, 1969), pp. 242-262.