Alternative Financial Strategies: The Results of Some Policy Simulations with the Multi-Country Model
International Finance Discussion Papers Number 235
December 1983
ALTERNATIVE FINANCIAL STRATEGIES: THE RESULTS OF SOME POLICY SIMULATIONS WITH THE MULTI-COUNTRY MODEL
by
Steven A. Symansky Richard D. Haas
NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgment by a writer that he has had access to unpublished material) should be cleared with the author or authors.
ALTERNATIVE FINANCIAL STRATEGIES: THE RESULTS OF SOME POLICY SIMULATIONS WITH THE MULTI-COUNTRY MODEL
* By Richard 1). Haas and Steven A. Symansky~/
1. Introduction
In this paper, we report on a set of policy simulations with the Multi-Country Model (MCM) developed by the staff of the Federal Reserve Board.
A description of the MCM is outside the domain of this paper. We will simply point out that it is a large scale econometric model which explicitly models the economies of the U.S. and four of its largest trading partners. Particular emphasis is placed on international linkages and financial relationships. Full descriptions of the model are available elsewhere 2/ This paper reports on an exercise which is the first; attempt to use the MCM to systematically analyze alternative financial policies. In particular, we have chosen to compare and contrast the properties of the MCM with the small theoretical models of Bryant (1980) and Henderson (1982). These open-economy models are extensions of the classic Poole (1970) article. In its simplest form, they are designed to answer the question of which instruments policy makers should control in order to most effectively minimize variations in
output when confronted by various types of unforseen shocks to the
*/ This paper represents the views of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or othe rmembers of its staff. The authors are indebted to Ralph Bryant, Chuck Freedman, Peter Clard, Dale Henderson, Peter Hooper and Caryl McNeilly for helpful advice and comments. Nevertheless the usual caveat applies.
economy. The answer, equally simply put, is that it depends on the source of the initial disturbance: output is best insulated from disturbances originating in the home goods market by holding aggrecates (i.e., money and official reserves) constant, while financial disturbances are best dealt with by fixing interest and exchange rates </ Furthermore, if either a goods market disturbance or an asset market disturbance involves the foreign country as well as the home country, then these theoretical models suggest that there is no policy conflict between the home and foreign authorities; the same policy prescription is appropriate for both countries. However, cases of policy conflict can occur if the shock is confined to one country. In some cases it can be shown that the optimal policy for one country is inimical to the foreign economy.
A number of results emerge from the simulations. In some instances they point out areas of the econometric model that suggest themselves for further development, such as the specification of the consumption function. In other cases, the simulations draw attention to items that are frequently abstracted from in theoretical models; factors that can not be safely ignored by policy makers. Three of these factors are the effect that changing the indebtedness has on balance of payments through service flows, third country effects, and the richer dynamics included in large scale models. Finally, and of some policy interest, is the discovery in the simulations of the added importance of the definition of money in an open economy. Specifically, the existance of foreign currency denominated bonds can potentially alter the interest rate elasticity of the demand for broadly defined money enough to De a concern for policy makers who are considering an aggregates-constant
policy.
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We begin, in Section II, with a short exposition of the underlying theoretical models. In Section III, we describe and analyze the simulation results of three different types of shocks on the five MCM countries. Section IV develops the idea, again with simulations, that the choice of a monetary aggregate is particularly important in an open economy. In the final section we summarize our findings and draw some
conclusions.
II--The Theoretical Underpinnings
The basic issue that we are trying to analyze with the MCM has its earliest expression in the classic work by Poole (1970). In that paper, the question of stabilizing interest rates as opposed to monetary aggregates is analyzed in terms of the source of the exogenous disturbances. The criterion for preferring one regime to another is based on the variance of real output. As it turns out, real ou:put is better insulated from financial shocks (e.g. exogenous shifts in the supply or demand for money) if interest rates are pegged, rathe~ than if the money supply is fixed. Similarly, the effect of real-side disturbances (e.g., shifts in the consumption or investment functions) on income are less if the aggregate is fixed than if the interest rate is held constant. In the former case, induced changes in interest rates serve to moderate the impact on income.
In what follows, we attempt to sketch out the theoretical model that we use as a reference point. The particular theoretical model that we describe in this section does not correspond in all respects to the MCM, We shall occassionally discuss differences between the two in the next two sections. Never the less, they share many common properties and a study of a small theoretical model was a useful first step in developing our intuition about the properties of the large scale MCM. A rigorous derivation and presentation of the theoretical model can be found in Henderson (1982). A narrative description of the same type of
model can be found in Bryant (1980, Chapter 21).
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We begin by focusing on three markets; the goods market, the money market and the home bonds market. Aggregate demand is a positive function of income in the home and in the foreign country, real interest rates in both countries, and relative prices as well as the level of the exchange rate and domestic prices. The latter two variables have "Pigou" type effects. A drop in prices or a depreciation of the home currency increases the value of wealth, measured in the home currency, and thus increases consumption.2/ The exchange rate enters the relative price variable directly and, as an element of price expectations, it also appears in the real interest rate term. The supply of output derives its elasticity from price surprises. Labor agrees to a one period nominal wage, which without price prediction errors, would result in full employment output. If labor underforecasts the price level then the real wage will be low enough for output to exceed its full-employment level. The loci of goods market equilibrium in nominal interest-real output space is shown in Fig. 1 as line XX.
Money market equilibrium is depicted by loci MM. The demand for money is a function of income, home prices, the price of the foreign goods expressed in the home currency, the home (nominal) interest rate and the foreign interest rate adjusted for exchange rate expectations. Thus, the exchange rate enters both as a transactions variable and as a rate-of-return variable. The supply of money is taken to be exogenous.
The demand for home currency bonds is a function of the same variables as the demand for money functions in the two countries (as is the demand for foreign currency assets, the omitted market in this model). Additionally, it is posited that the interest rate elasticity on
heme bonds is higher than that of home currency, and that the income
elasticity of the demand for home money is higher, absolutely, than the income elasticity in the demand for home currency bonds. It is further assumed that residents may hold the bonds of both countries but only hold the currency of their own country. These factors imply a bond market equilibrium, BB in Figure 1, with a flatter slope than the money-market equilibrium line. The supply of bonds, an outside asset, is taken to be exogenous.
The natural inclination of many readers may be to view Figure 1 as a conventional IS-LM-BP diagram. The parallels are strong and in analyzing many questions no harm would be done by interchanging the two diagrams. However, they are not identical and it is useful to spell out how they differ. First, the BB line is not the same as the external constraint facing the economy. It does not incorporate export and import functions, It is not a difficult task to incorporate these considerations and, over a wide range of import propensities and asset substitutability parameters, the results are unlikely to be qualitatively affected. Second, the textbook IS-LM-BP diagram treats the price level as exogenous whereas Figure 1 does not. In the diagram, the price level has been solved for by using the aggregate supply relationship that holds when the nominal wage rate is consistent with full employment. Finally, the traditional model is an end-of-period balancing model, whereas the model described in Figure 1 is a beginning-of-period model. This means, for example, that any wealth changes produced by a current account imbalance affect the system at the beginning of the next period, not at the end of the current period.
Consider the shift of the goods-market equilibrium, from XX to
xiyI in Figure 1. Such a shift might reflect either a shift in a
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coun:ry's consumption function or a shift in preferences from home goods over foreign goods.
If the authorities respond to this perturbation by fixing money and not intervening in the exchange market, then the home interest rate will rise and the home currency will appreciate. This latter effect leads to a moderation of the original increase in demand as well as a decrease in the demand for money and home bonds. Thus equilibrium will
occur in the triangle ACD, at an income level no greater than Y If, on
1" the other hand, the authorities respond by fixing the interest and exchange rates, then the stocks of money and bonds become endogenous and will change until they pass through point E. At point E, the level of
~ income is at Yos a level that represents a larger disturbance in output than occured when aggregates were held constant. By fixing aggregates, in tris case, the damping effects of interest rates and exchange rates are called into play. However, endogenizing these variables does not always serve to diminish the effects of exogenous disturbances on output and indeed may serve to exacerbate them. Such a case is shown in Figure 2.
Here the shock is a shift in asset preferences--an increase in the demand for home currency bonds and a concomitant decrease in the demand for foreign currency bonds. This is shown as a shift in the BB line to pit,
If neither the exchange rate nor the interest rate move, then no pressure is exerted on output and it remains at Yo In this case, the central bank has simply accomodated the shift in the public's asset
preferences by altering their own supplies in a manner which exactly
offsets the altered demands and eliminates any need for exchange-rate
adjustment. If, however, the authorities strive to maintain both the money supply and the stock of official reserves (i.e., their holdings of foreign currency bonds) constant, then the interest rate and the exchange rate must adjust to equilibrate the altered demands and the unchanged asset supplies. The increased demand for home-currency assets will, in the first instance, put downward pressure on the interest rate and tend to appreciate the exchange rate. The new equilibrium will occur in the triangle ADC in Figure 2. The appreciation will shift the MM function to the right, the bond-market function upwards from pip! and the XX function to the left. Output will rise if the expansionary effects of lower interest rates outweigh the contractionary effects of an appreciated currency. Conversely, if the exchange rate effect is greater, output will fall. In either case the variability of income is higher with fixed aggreates than fixed rates.
The following chart was prompted by a similar one found in Bryant (1980). It summarizes the effect on output in three possible cases--a shift in demand to foreign goods from home goods, a shift from home savings to increased consumption of home goods, and a shift in asset preferences in favor of home-currency bonds. The first two shocks are depicted in Figure 1, the last in Figure 2. The chart also lists a column for the foreign country. One of the issues we discuss in this paper is whether the preferred policy choice from the home country's point of view is also preferred by foreign countries or whether it creates a policy conflict. The last column of the chart summarizes this topic. The deriviation of the results is not shown here but can be found in Henderson (1982) </ The intuition is none the less straight-forward.
Consider the second case in Chart 1, an increase in consumption
SUMMARY OF SHORT-RUN QUTPUT EFFECTS FROM VARIOUS EXOGENOUS DISTURBANCES
ABROAD
TYPE OF AT HOME POLICY DISTURBANCE Rates Fixed Aggregates fixed Rates Fixed Aggregates fixed CONFLICT? c c in demand for Mi! aa Ms r+ foreign goods equal to aj R + e + R + e + NO decrease in demand for Y ++ Yy¥ Y ++ Y +
Income rises less in the fixed both countries rate case. The increase in de- prefer to fix
mand is partially offset by inter-|aggregates
est rate increases and appreciation of the foreign currency.
Income falls more in the fixed rate case. There is no decrease in the interest rate or depreciation to moderate aggregate demand.
home goods.
YES home country prefers fixing aggregates, the foreign country prefers fixing rates.
M + rt
R + e+
Y + Y +4
Variable exchange rate exacerbates the export stimulus
M + r+
R 4 e+
Y ++ Y +
An increase in interest rates and appreciation of the home currency moderate demand in the aggregates fixed case. This income changes less there.
Increase in demand for home goods equal to decrease in savings.
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Increase in demand for
home currency bonds M (unchanged) ry M (unchanged ) r¥ NO equal to decrease in R + e ¥ R ¥ e+ demand for foreign Y (unchanged) Y + Y (unchanged ) Yo 4
toth countries prefer to fix rates.
currency bonds. Income may increase or decrease
if aggregates are stabilized. The interest and exchange rates work at cross purposes.
Income is unaffected if the authorities stabilize rates.
M = Money e = exchange rate (home currency/foreign currency) . R = Foreign Exchange Reserves r = interest rate Y = Output
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of the home good equal to a decrease in savings. If a shift up in the consumption function in the home country is allowed to appreciate the home currency (because the home authorities choose to stabilize aggregates) then the effect on foreign income is amplified above and beyond the expansionary effects that home output would have on foreign
output if rates were held constant.
III. The Simulation Results
Our motivation for undertaking this exercise was three-fold. First, by conditioning our "priors" these small theoretical models serve as a convenient reference point for larger (MCM) scale simulations. Our in‘tial expectation was that these simulations might well uncover some previously unknown problems with the model. Second, we thought that the richness of a large model might point out some areas that the small models might fruitfully be enlarged to incorporate. For example, the MCM explicitly models the service account, allows for capital formation, accounts for the effects of savings within the period (i.e., is an end-ofperiod model), incorporates "third-country" effects in its analysis, and has a rather elaborate dynamic structure. These are all areas which the small models ignore as a matter of analytical convenience, yet they are potentially important both in accurately modeling the economy and for policymaking. Last, it was our hope that we might discover in our simulations some aspect that would be of interest to policy makers. We believe that the results of using alternative measures of money in the fixed aggregates simulations shed some new light on the question of
whether broadly or narrowly defined money is potentially best suited to
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stabilization purposes. (This idea is further developed in Section IV.)
In considering alternative policy regimes, we have chose. two polar strategies. That is, we assume either that the authorities fix both the money supply and the stock of foreign exchange reserves (and thus allow the exchange rate and the interest rate to be endogenously determined) or that they do exactly the opposite and fix both the exchange and interest rates while endogenizing the two quantities. This choice is consistent with the idea that these "pure" strategies can be shown, in theory, to dominate the so called "mixed" strategies (i.e., fixing one rate and one quantity) Our simulations also assume that policy makers do not respond to any information which the endogenously determined variables provide, rather they set policy at the beginning of the period and adhere to it. Consider, for example, the case where money is fixed by policy makers to be consistent with some level of real activity. Now imagine an unexpected positive real-side shock. Policy makers observe an immediate but unexpected increase in the interest rate (but, owing to measurement lags, cannot observe the increase in real output). Assuming they can rule out a shift in the demand for money, they can improve on the aggregates-constant policy by decreasing the money supply in response to the information provided by the increase in the interest rate. Of course it still remains true that an aggregatesconstant policy is superior to a rates-constant policy. The point is simply that potentially this policy can be improved upon. This is a refinement which our simulations do not incorporate but it is certainly an area meriting future attention.
Three basic types of shocks were run. First, a switch in
demand from home goods to foreign goods and second, a shift between home
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goods and home savings. Both of these are real shocks and correspond to the top two rows of Chart 1 in the last section. The third shock is a financial shock consisting of a shift in asset preferences between home and foreign currency assets. It corresponds to the bottom row in the summary chart. The simulations were run over a 24 quarter period. In the case of the goods shocks, the disturbance was a one quarter change in demand, while the securities shock was a change in the one quarter flow. It was felt that these transitory shocks were preferable to permanent shocks because they do not pose the same conceptual problems for the long-run expected level of the exchange rate and prices. The two goods shocks were applied to each of the five MCM countries individually. The securities shock was run with the four non-U.S. MCM countries; the model structure would make running the shock on the U.S. a redundant exercise. Unlike the presentation of classical statistical results, there is no well-defined manner of presenting simulation results. We have chosen to use a variety of methods, which all tend to tell the same story. Following the narrative discussion is a set of charts and tables. All of these results are presented in terms of deviations from the baseline solution. Both home income and a weighted average of foreign income are plotted for each country. These results, as well as values of the interest rate, exchange rate, the money supply and intervention are presented in tabular form. Finally, summary statistics for home and foreign income (means, variance, squarred deviations, and the sum of absolute deviations) over four different time horizons are presented, Before we begin to analyze the individual shocks, it is important to spell out exactly what we mean by the various rates and
aggregates which we will alternately endogenize and exogenize in the
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simulations. The exchange rate is the bilateral U.S. dollar rate except in the U.S. where it is the trade weighted value of the dollar. The interest rate is the representative short-term interest rate. In the U.S. and Germany, this is the 30 day treasury bill rate, in Japan it is the gensaki rate. The finance company rate is used in Canada, while the local authority rate is used in the U.K. Official foreign exchange reserves are defined as the cummulated sum of earned foreign exchange reserves. They do not include capital gains or SDR allocations.
The definition of the stock of money is far less obvious than the definition of the above variables. Presumably in the real world, and certainly in the MCM, the authorities can choose to stabilize any — collection of monetary assets either broadly or narrowly defined. The central monetary aggregate in the prototype MCM country is unborrowed reserves. The elasticity of this function is governed by the demard by the banking system's demand for free reserves. As an empirical matter, the interest rate elasticity tends to be very high in the MCM. In terms of the IS-LM framework, this implies that the LM curve is quite flat. Consequently, it is no surprise that there is not a great deal of difference between the fixed-rates case and the case where unborrowed reserves are fixed.
We have, therefore, opted not to stabilize unborrowed reserves in our simulations. Rather we have chosen to stabilize Ml in the U.S., Canada, Japan, and the U.K., and central bank money in Germany. This has the dual advantage of conforming much more closely to actual central bank behavior as well as providing results which are much more interest‘ ng to discuss. This theme, the choice of an appropriate monetary aggregate, is
One we will return to again in the next section.
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IIIA. The Home Goods/Foreign Goods Shock
In this shock we decreased demand for the home good by 5% of real domestic consumption for one quarter and increased the demand for the foreign good by the same amount. The theoretical models predict that both the home and foreign countries will better stabilize their output if they both fix their respective money supplies and official stocks of foreign currency bonds (hereafter “aggregates"), than if they stabilze the interest rate and exchange rate (hereafter “rates"), Holding the aggregates fixed induces lower interest rates and a depreciated currency ‘in the home country and higher interest rates abroad, all of which serve
to stabilize income in both countries.
Canada
The impact effect of the shock on Canadian output is indeed less when aggregates are fixed, just as the theory suggests. Income returns to its pre-shock level faster when interest rates are allowed to fall and the exchange rate to depreciate. The exchange rate is responsible for most of the improved relative performance of the aggregates-constant case early on with interest rates becoming increasingly important over time. In fact, endogenizing both of these rates is enough to generate income overshooting; this doesn't occur when rates are fixed. Income, in the fixed aggregates case, ultimately returns to very nearly its initial level largely because of positive interest rates that develop mid-way through the simulation.
Foreign income, as defined in the Canadian model, conforms to
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our priors only on impact. The dramatic cycle reflects the large weight given to U.S income. In the U.S. there is an extremely strong investment multipler-accelerator mechanism, which is particularly volatile in the presence of variable rates.
The various aggregates behave as expected as does the exchange rate. The interest rate, which is positive at the end of the simulation,
poses no problem once the income overshooting is allowed for.
Germany
In Germany, output patterns also conform to the pattern suggested by theory. In contrast to Canada, however, both the rates-and aggregates-constant policies lead to overshooting, though endogenizing the rates accelerates the return to the long-run level of output by moderating fluctuations in it. In both cases a trade surplus attributable to decreases in income and prices is the source of the initial rebound (and overshoot) in income. A traditional acceleratermultiplier has come into play by the second half of the simulation,
Only on impact is the response of foreign income unambiguously in accordance with the theory. The high volitility of the U.S. investment function when aggregates are fixed again provides the explanation for subsequent longer-run behavior.
Interest rates fall on impact as expected, and then cycle in a fashion consistant with output and price patterns, again as expectad.
The exchange rate is depreciated relative to the baseline, throughout the simulation. This reflects the fact that the lagged cummulated current account plays an expectational role in the MCM. Thus the current-account
deficit, which is a product of the shock, gives rise to expectations of a
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depreciation which is reflected in downward pressure on the exchange rate. Since this is a stock effect, and the initial shock is large relative to the subsequent trade flows, the effect is long lasting. The lagged cummulated current account is also the source of the continuing loss of reserves in the rates-constant case. Here the expectation of a weak currency manifests itself as a private capital outflow which must be acconmodated by the central bank if rates are to be held constant. It is the lag on the expectational variable which explains why the second quarter effects are larger than the impact effects for both the exchange rate (aggregates-constant) and reserve losses (rates-constant) cases. This partially delayed effect on reserves and hence on the central bank's balance sheet is the reason why money drops more in the second quarter than in the first. Other than this minor anomaly, the behavior of money
in the German model conforms to our theoretical priors.
Japan
Inspection shows that there is very little difference between the rates-and aggregates-constant policies in the short run, but the theory is contradicted to the degree that differences do exist, The reason for this discrepancy is that the Japanese consumption function contains an inflation term. High inflation rates discourage consumption and encourage savings. When aggregates are fixed, the depreciation quickly feeds through to the inflation rate. The resulting increase in the inflation rate leads to a drop in the consumption function and hence income. This effect is obviously absent in the rates-constant case.
With the passage of time, the Japanese results come closer to
satisfying our priors. By the end of the simulation, it is clear that
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the aggregates-constant policy is in fact the preferred strategy.
One striking feature of the simulations is the extreme "chopiness" of Japanese output when rates are fixed. This is traceable to the large impact effect of the shock on the stock of official exchange reserves and the subsequent way in which this variable feeds through into foreign investment receipts. In particular, a pattern of seasonal factors which alternate in sign, is applied to the changed stock of reserves.
The behavior of foreign income on impact and over the following two years conforms to the predictions of our theory (i.e., aggregates constant is the preferred strategy). Over time, the volatility of U.S income, apparently resulting from a strong accelerator, causes the aggregates-constant strategy to induce a good deal more foreign income instability.
Interest rates fall on impact, as expected, but go up as prices and income levels rise above baseline. The other potential policy variables--the exchange rate, Ml, and intervention--behave in the expected fashion. The exchange rate remains depressed throughout the entire simulation. Ml is also lower than control for all but a few quarters at the end, where reserve increases which occur in the final quarters of the simulation are monetized. Normally, we would expect intervention to be negative--i.e., lead to a loss in reserves. This happens for the first 19 quarters of the rates-constant simulation until there has been enough downward price and income adjustment to cause
reserves to begin to climb.
Cc e ~~ e
The chart showing the pattern of output in the U.K. under the
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alternative strategies shows that the response is very nearly the same in both cases. The simulation results in Table 7 show, by mean and squared deviation criteria, that the properties of the theoretical model are viclated for each and every time period.
The explanation of this puzzlement lies in the specification of the consumption function coupled with the choice of aggregates stabilized by the authorities. In the U.K., sterling M3 enters directly into the corsumption functions. In the aggregates baseline simulation Ml is fixed, and interest rates must fall to hold M1 at control because income falls dramatically on impact. As interest rates fall, time deposits and hence M3, and ultimately the consumption function, shift downward.
The theoretical results might ‘have held if the simulation had fixed M3, or if M3 did not appear in the consumption function!
In any event, the similar income paths suggest a very flat implicit LM function in the U.K. monetary sector. In this case, there is very little to choose between a rates-constant and an aggregatescorstant strategy.
Were it not for the buffering effect of inventories the difference between the two paths would be more pronounced. The inventory equation is responsible for another feature of the simulations--their extreme chopiness. The lagged coefficient on inventory investment is -.7. Thus, once set in motion it causes income to follow a pattern of damped, one period oscillations.
By virtually all of the criteria presented in Table 8, foreign income behaves as expected in the U.K.. The four potential policy variables (i.e., the two rates and the two aggregates) seem to conform to
the theoretical paradigm. The impact and short-run behavior in all cases
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behavior in all cases is exactly as expected. The cyclical behavior of income is eventually reflected in the interest rate and exchange rate
behavior. (It should be mentioned that in the rates-constant case, the local authority rate was fixed, not the short-term government rate whose
changes are reflected in Table 3.)
The U.S.
Income in the U.S. returns faster and sooner to its control level when aggregates are fixed, exactly as theory suggests. However, it overshoots and cycles enough to cause the summary statistics of Table 7 to indicate that a rates-constant policy dominates over the long-run. Both trade and investment cycles contribute to this overshooting. This investment behavior is the flip side of foreign income behavior (as viewed from abroad) that has been discussed above. A strong multiplier/accelerator mechanism in the U.S. model causes income to overshoot even when rates are fixed.
The trade-weighted dollar generally depreciates as expected, though in the final five quarters of simulation lower income has led to an appreciation (the fact that the second quarter effect is larger than the impact effect can be traced to lags in the Canadian dollar/U.S. dollar equation.) Interest rates behave in the cyclical fashion required to keep the economy on its demand for Ml function while income cycles.
Foreign income behavior conforms to our priors.
More often than not, the impact effects of the home good/foreign good shock conforms to the theory. In the two cases where
they don't--the U.K. and Japan--the reasons for this divergence are
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understood and easily explained.
IIIB. The Home Goods/Home Savings Shock
The theoretical model suggests that this shock will lead to a policy conflict. The home countries can best dampen the effects of the shift in its consumption function by fixing aggregates--the classic Poole solution. The foreign countries will be disturbed more by the change in the exchange rate which accompanies the home country's optimal policy than if rates were fixed. Thus, the preferred policies of the two countries conflict with one another: The home country wants a floating exchange rate regime, the foreign country prefers a fixed-rate regime.
To investigate this issue, we shifted the consumption function upwards by the same amount as the shock in the first case--5% of domestic consumption.. The shock is not quite symmetrical with the home goods/foreign goods shock mentioned above. They differ not only in direction, but also in the fact that in this case there is no exogenous shift in imports, only a shift in the consumption function. Because there is no direct disturbance to the balance of payments, the difference between exchange rate regimes is lessened. This is certainly not to say, however, that there are not significant and important differences between the alternative policy strategies. We will therefore, as before, analyze
the results on a country by country basis.
Canada In Canada, the conventional wisdom holds and fixing aggregates does. tend to buffer income more by inducing stabilizing movements in the
rates. This is particularly true with the passage of time. Income
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overshoots in both regimes but by less and more briefly in the fixedaggregates case. We can trace this outcome to the net worth term in the consumption function. Initially, consumption rises more than income. The excess of consumption over income comes from a trade deficit and a draw-down of inventories. Lags in the consumption function magnify the impact effect. This in turn causes net worth to become negative. Ultimately, the persistent effect of a continuing lower level of wealth outweighs the effect of a transitory increase in the consumption function and causes income to fall below its initial value. The economy is clearly smoothed better when interest and exchange rates are free to move.
In the Canadian case, foreign income paths do seem to follow the expected pattern. Foreign income rises with activity in Canada, the more so if the Canadian dollar appreciates. Thus there is an inherent policy conflict between Canadian and foreign authorities.
The behavior of the potential policy variables (i.e., the various rates and aggregates in those simulations when they are endogenous) is easily explained. The lag in the exchange rate equation yields a larger change in the exchange rate one quarter after impact. Income changes govern movements in money in the rates-constant case. The cumulated basic balance, functioning as an exchange rate expectations proxy, is the principle determinant of intervention when rates are
fixed.
Germany
In Germany, as in Canada, holding aggregates constant is the
preferred policy from the German point: of view. A drop in net worth and
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its subsequent effect on the consumption function (exactly as described in the Canadian case) is a principle reason for the overshooting of income, A second reason is the effect of higher domestic prices on net exports and the subsequent effect of this variable in the dynamics of the income determination process.
The information describing the path of foreign income is more mixed. On impact, income abroad conforms to our priors, but thereafter it is less clear that there is a policy conflict. What is clear is that endogenizing the rates leads to a shorter income cycle though not necessarily one larger in amplitude.
The increase in the short-term interest rate merits some comient. The impact value is a good deal less than in the second quarter. This reflects the role of free reserves in the interest-rate equation. (Actually, the equation is more accurately described as a demand for free reserves function normalized on the interest rate.) The coefficient on lagged free reserves is slightly larger than its con:emporaneous value. This, coupled with the fact that free reserves may be required to move a great deal to stabilize central bank money, means that the dynamics of the interest rate can be complex.
The exchange rate appreciates on impact, as expected, but by the third quarter depreciates below the baseline. This reflects the important role played by the lagged cumulative current account as an expectational variable. The expansion has led to deficits, which have in turn caused speculators to position themselves for a downward adjustment in the exchange, rate and, in so doing, cause a depreciation to come about.
When rates are fixed, the lagged cumulated current account
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plays an important role in determining the quantity of intervention. The second quarter effects surpass the impact effects for central bank money. lags on consumption and income in the currency and demand deposit
equations, respectively, account for this.
Japan
The econometric model results are in accordance with our prior expectations. Holding aggregates constant is the preferred strategy, though there is not a great deal of difference between the two policies. There is not the overshooting of income in the aggregates-constant case which we observed when there was a shift in preferences from home goods to foreign goods. This is because the effect on the current account, and hence exchange rate expectations, is milder when imports are not directly affected in the shock. In addition, domestic spending is not very sensitive to changes in the interest rate, especially in the short run. The discussion of the "chopiness" of income in the Japanese home goods/foreign goods shift discussed above applies here. It is traceable to changed official indebtedness and seasonality in the service accounts.
Foreign income is uniformly contrary to the predictions of the theoretical model. Thus, in this case, the MCM suggests that the potential for policy conflict is more imagined than real. A major part of the explanation for this centers on the effect of third currencies. For example, our theory suggests the Yen should appreciate with respect to the foreign currency and it does in fact appreciate against all currencies. However, the change is not proportional and the U.S. dollar
rises relative to the DM and pound sterling. Since the income multiplier
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is higher in the U.S. than in these other countries, the net effect was to dampen foreign income. Thus, in this case, foreign income is better
stabilized when exchange rates are flexible.
United Kingdom
The domestic income paths conform to expectations based on the theoretical models. This was not the case when the shift in the consumption function was accompanied by a shift in import demand (i.e., the home goods/foreign goods shift described earlier.). Apparently, this reflects the impact the cumulated current account has on the exchange rate. In the present case, the current account deficits are lower. Consequently the impact appreciation is stronger and thus more effective in buffering income.
The behavior of the. foreign income variable in the U.K. does not. conform to our theory. This is the other side of the expectational process alluded to above. The surplus that accumulates abroad are soon reflected in both an expected, and then an actual, appreciation of the foreign currency. Thus, foreign income is better stabilized if rates are
flexible than when they are held constant.
United States
The income path in the U.S. generates mixed results. On impact it conforms (barely) to our theory, in the short run it doesn't, while in the long run it does conform by some criteria, but not by others. In the short run, flexible rates apparently do more than dampen output, they trigger the accelerator/multiplier mechanism which is
particularly strong in the U.S. model. Thus it seems that holding M1
-26-
constant in the U.S. both increases the frequency and the amplitude of the income cycle. The first property tends to auger in favor of the theoretical results, the second against it.
Foreign income is very nearly the same on impact (there is less than .01% difference between the two strategies) and conforms to ou” theory on the basis of the sum of squared deviations, arguably the most useful measure, although by some other criteria the theory is contravened. Third country effects are an important factor in comparing the two policy strategies. Only in Germany does comparing income conform to the theory, and it is the DM which has the largest depreciation. That is, it is only the DM which has unambiguously depreciated against all of the MCM currencies.
The potential policy variables behave as expected once the lag in the Canadian dollar equation (in the case of exchange rates) and income lags in the demand for money functions (in the case of interest
rates and M1) are allowed for. III.C The Securities Shock
In this, the final shock analyzed in this section, we simulated a change in asset preferences on the part of private wealth holders. Specifically, we postulate a shift of 4 billion dollars (U.S.) into home currency bonds (C$, ¥, DM or £) from U.S. dollar-denominated bonds. To the degree that portfolio managers view home and foreign currency bonds, suitably adjusted for exchange rate expectations, as perfect substitutes for one another, there will be no discernible macro-economic effects due
to this change in preferences. But if wealth holders will hold different
-2]~-
relative supplies of assets only at different relative prices, then the exchange rate and interest rates must adjust with noticable effects on activity.
This simulation experiment corresponds to the description in the final row of Table 1. Assuming aggregates are constant, there will be downward pressure on the home interest rate and upward pressure on the external value of the home currency. The affect on income is ambi guous-the lower interest rates should increase output, the appreciated home currency should lower it. There is no motivation in the theoretical models for output to change if rates are held constant. In this case, the central. bank has simply accommodated the changed preferences of the public. The classic Poole results hold and there is no policy conflict between nations.
We turn to the four country simulations. (There is no separate U.S. simulation. It would contain no new information, being simply the
weighted mirror image of the four simulations that are presented. )
Canada
Initially, Canadian income is best stabilized by holding rates constant, as is expected. However, there is clearly a problem with this policy over the second half of the simulation. The oft neglected service account is at the root of this. Part of the shock involves increasing official holdings of U.S. bonds. This stock increase eventually has substantial, and continuing, foreign investment receipt implications on the service account. This is one aspect of the model which is sensitive to levels of the baseline variables, not just changes in them. In
particular, the export surplus, and hence income, would have been less,
-28-
had the level of U.S. interest rates not been as high as they were in 1979 and 1980. In the aggregates-constant policy, reserves don't change and the service account cannot provide the impetus for growth in income. In this case, the exchange rate effects dominate the interest rate effects and income falls. This is generally the pattern, at least in the short run, in the other countries.
By and large, foreign income does not totally conform to our theory and thus a conflict between the home and foreign governments occurs. U.S. income dominates foreign income, as defined from a Canadian standpoint. In the short run the drop in Canadian inccme is reflected, via conventional trade linkages, in the U.S. income. As Canadian income becomes increasingly positive (because of the atove mentioned service account effect), so it also does in the U.S. where it is amplified by the vigorous multiplier/accelerator found in the U.S. model. It appears that both the high level and the high variance of income abroad is just an echo of the home income path and if the service account item were smaller, then the simulations would conform mcre closely to the theoretical results.
The pattern with variable rates is largely as expected. The smal] impact U.S. dollar depreciation has, on balance, an expansionary effect on U.S. income initally, though lower rates of Canadian éctivity ultimately are reflected in the income paths of its trading partners. Canadian interest rates fall on impact, as expected, but owing to lags in the elements of the Ml function, and the small impact effect of the exchange rate on income and prices, it is not until the second cuarter that the decline is pronounced. The exchange rate appreciates though the
delayed effect is larger than the initial appreciation because cf lags in
-29.
the model. Ml moves in harmony with income. Intervention is not only large on impact, as expected, but stays relatively large throughout the Simulation. Normally, the cumulated basic balance serves as an expectational variable in the exchange-rate process. However, when the exchange rate is fixed, the same speculative forces that lead to an appreciation give rise to capital inflows and increases in official
reserves.
Germany
Germany is the one country which comes the closest to Satisfying all of the conditions implied by the theory. When rates are held constant, there is almost no variation in output. The small deviations that are measurable can be traced to the service account.
The impact effect of both the exchange rate and the interest rate is small relative to the delayed effect. It is only after two quarters of simulation that the effect on rates is noticably different
from the fixed-rates case.
Japan
Japan is the one country where an aggregates-constant policy causes income to rise on impact. This fits within the range of theoretically possible outcomes, but it does raise the question of how the specification in Japan differs from the other MCM countries. The answer is found in an aspect of the consumption function already discussed. Specifically, the asset preference shift leads to a home currency appreciation and a lower inflation rate. This, in the Japanese
model alone, leads to less savings and higher income. Eventually though,
the conventional effects come to dominate the income determination process.
When rates are fixed, on the other hand, the "“chopiness" discussed in the other Japanese simulations is immediately apparent. The stock of assets used in generating service flows, and thus net exports, is transformed by a set of seasonal variables of alternating sign. This explains the irregularities in the income pattern. The shift from a strong negative effect to a path which seems to be very nearly certered on zero is explained by the fact that there is an asymmetry between income receipts and payments in the service account. Altering stccks of claims and liabilities gives rise to the expected services flows, but because of the empirically determined lags, they have a staggered impact on net exports.
By all criteria (save the impact effect) the rates-constant policy is superior, as theory suggests. The results are strengthened more if we allow for the service account items discussed above.
Our theory is confirmed again when we examine income betiavior outside of Japan. In this case the fixed-rate strategy clearly dcminates the alternative fixed-aggregate strategy. The depreciation of the foreign currency has caused a trade cycle abroad.
The increased demand for Yen bonds drives the interest rate down for two years. Ultimately, strong income growth coupled with the need to hold Ml constant leads to a rise in the domestic interest rate causing the Yen to appreciate. The subsequent overshoot is caused by current account deficits which develop in the course of the simulation
and lead to expectations of a depreciation.
3] -
United Kingdom
The U.K. is the only country in which the domestic income path contravenes the theory in all regards. It is clear that holding rates constant exacerbates income movements rather than eliminates them. The problem here again is the inclusion of sterling M3 as an argument in the consumption function. Holding the short-term rate constant opens up a gap between it and the discount rate in the U.K. model. As a result time deposits, an M3 component, fall off, consumption drops and income follows. In addition, consumption declines because of the anomalous modelling of tax receipts in the U.K.. An increase in intervention is assumed to cause tax revenue to rise and thus disposable income to fall.
The path of foreign income is in agreement with the theoretical
model.
IV. The Choice of an Aggregate
In the last section we postponed a full explanation of the rationale for using a narrow definition of money in those simulations where a monetary aggregate was held constant. In this section we want to develo this idea by first making some elementary theoretical points and then examining some simulations that differ only in the measure of money which is stabilized.
The basic point is easily stated in a closed system. In this case, with conventional assumptions about the sign of partials in asset demand functions and the assumption of gross substitutability, it can be shown t:hat the interest rates and the demand for money are inversely
related. However, in an open economy there is another asset (in addition
- 32-
to narrowly defined money) that is negatively related to the domestic interest rates, namely foreign currency bonds. Thus, it is possible for the positive interest rate effect of an increase on the home rat2 on time deposits, and hence broadly defined money, to dominate the negative effect it has on narrowly defined money. A decrease in demand for foreign currency bonds provides an additional source of allocatable wealth.
This idea is illustrated with the aid of equations 1) through 4).
Equation 1) is the wealth (W) constraint for four types of financial wealth: narrowly defined money (M), time deposits (D) which together with M constitute broadly defined money, home-currency bonds (B)
and foreign currency bonds (F).
1) M+D+B+F=W
Equations 2) and 3) show the effects of altering the domestic
bond rate, RB, and the time deposit rate, RD, on the various assets in
equation 1) and impose the constraint that the net effect be zero.
dW - + 2) dRB = “pp + Opp + Bag + Fen = 0 dW + -
3) dRD = “rp * pp * Bap * Fry =
Equation 4) is the sum of equations 2) and 3).
The first two elements in equation 4) describe the effect of changes in domestic interest rates on narrow money which is unambiguously negative. The first four elements describe the same interest rate effect on droadly defined money. The effect may be positive or negative. Perraps this is best seen by referring to the last four elements of the equation which summarize the interest rate effects on the bond market. Assuming gross substitution (i.e., Bop + F ep > 0), it appears that if there are sufficiently strong negative RD effects on both types of bonds, then the bond market reaction can be negative. This implies that it is possible for the interest rate effect on the demand for broad money to be positive.
Should this be the case, then the money market equilibrium line, MM, in Figures 1 and 2 is negatively, not positively, sloped. In this case, the output consequences of increased demand for home goods will be the exact reverse of the conventional case. In the conventional case, an increase in goods demand causes both interest rates and output to increase with the rise in the latter, tempering the former. However, if money-market equilibrium is described by a negative line in home interest rate-output space, (i.e., the interest rate elasticity of the demand for money is positive) then the increase in interest rates associated with the demand shift is large enough to actually result in a lower level of output after the increase in aggregate demand._/ Thus interest rates and output are inversely related to one another when there
8/
is a shift in goods demand.— In these circumstances, the conventional
-34-
wisdom concerning the optimal policy strategy may not hold.
Thus the choice of an appropriate aggregate in an Open ecoriomy has an additional dimension. Policy makers must be alert to the fact that foreign asset market considerations do affect the elasticity of the demand for money and, in the limit, can reverse the Sign of the homeinterest rate on the demand for broadly defined money. Furthermore, these factors may have substantial policy implications.
As it turns out, these conditions are met in the Canadian portion of the MCM: the own effect of the interest rate on the demand for time deposits is strong, as is the effect of interest-rate changes on the demand for foreign bonds.
We simulated the same three shocks discussed earlier (foreign goods for home goods, foreign savings for home savings, and foreign bonds for home bonds) in the Canadian model with three definitions of money-unborrowed base, Ml and M2--as well as the fixed rate regime.2/ In the Canadian model (as well as the German, Japan, and U.S. model) the net demand for base money is interest elastic. This modifies Figure 1 so that the MM Curve may be more elastic than the BB curve. In this framework, a shift in goods demand may produce either more or less output variation than the fixed rates case. While a positive demand shift produces a higher interest rate, it also causes the exchange rate to depreciate. To the extent that the increase in output resulting from the depreciation outweights the dampening effect of higher interest rates, the fixed-rates case may dominate fixed aggregates, Thus an ambiguity arises over the correct policy choice and will depend upon the model's parameters. As the simulations below indicate, in the fixed base
case, the MM line becomes nearly horizontal and the results are quite
-35-
similar to the fixed-rates policy. In sum, we have no prior notion that exogenizing either base or M2 is necessarily preferable to a rates-
constant policy.
The Home Goods-Foreign Goods Shock
This is the case where a fixed aggregate should dominate a fixed rate strategy for reasons discussed earlier. This statement is true as long as we restrict our definition to M1 or base. However, the Situation changes when M2 is entertained as a possible definition. Of the three measures, it is the most interest inelastic (albeit with a "perverse" sign) and this is enough to minimize the disturbance to real output. This need not necessarily be the case. If the income multiplier effect is strong, then the interest and exchange rate effects will be also. Here the shock involves not only a shift in the consumption function, but an increase in imports. Thus the net effect on income and other variables is less than it would be if the consumption funct:ion alone shifted. We shall return to this point in discussing the next simulation.
Thus, while fixing M2 does best stabilize income in this case. It is associated with extreme variation in the interest rate and exchange rate. In other words, M2 stabilizes output despite, not because of, the exchange rate effects. That these exchange rates effects can be destabilizing to income can be verified by examining foreign income.
Here the high variability in income outside Canada can be traced to the volatility of the exchange rate. There is a clear policy conflict here. M2 is preferred from a Canadian perspective while, (except on impact) any
other measure of money or a rates-constant policy would be preferred by
-36-
foreigners. As mentioned earlier, the base constant case is similar to
the fixed-rates case, but it does dominate it.
IVA. The Home Goods-Home Savings Shift
This case is analytically similar to the above case except that there is no change in import leakages (i.e., external constraint) associated with the consumption function shift. This means that the total income effect of a given exogenous shock will be greater, as will be the interest rate effect. The appreciation of the exchange rate serves to amplify the income diminishing effects of the shock when M2 is held constant compared to the (much smaller) appreciation resulting when Ml is fixed. The contractionary impact of the appreciation is so great that it is possible for M2 to be an inferior strategy to even a ratesconstant strategy for a real-side shock. And, by the criterion of the sun of squared deviations, this is exactly what happens here. In addition, we find that the very interest inelastic-M2 function requires very large interest rate movements to stabilize M2, as opposed to the other more narrowly defined measures of money. These relatively large interest rate movements were also found in the previous shock. It is worth noting that, except on impact, the fixed rates case dominates the
fixed aggregates model when base is exogenous.
IVB. The Home Bond-Foreign Bond Shock This is a case where an M2 constant policy is clearly preferable to a rates-constant policy for all time dimensions except on
impact. There are two questions to be answered here. First, why is M2 a
-37-
superior aggregate to Ml and base, and second, why doesn't a ratesconstant regime dominate a fixed M2 policy in the same way that it does a fixed-Ml or base policy?
The first question can be answered in a relatively straightforward fashion. The less interest and exchange rate sensitive the demand for money is, regardless of its sign, the less responsive output will be. This is the case in the Canadian model and explains why M2 is a Superior aggregate to Ml or base in the face of a shift in asset preferences.
The second question concerning the relative superiority of a constant M2 over a rates constant policy is more puzzling, at least on the surface. Alternatively stated, why should a policy which presumably allows absolutely no variation in either the exchange rate or the interest rate from a financial disturbance have more of an effect on home output than a policy which does? The answer is two-fold. First, the rates-constant policy does have output implications via the service account. This aspect was discussed in the last section. Second, the relative absence of movement in income when M2 is held constant is due not to the fact that components of income are largely unaffected by the large interest and exchange rate cycles but because they tend to offset One another. A trade and an investment cycle are superimposed on one anot:her in such a fashion that variations in output are minimized. In general, this need not be the case. It is not so much related to the use of M2 as an aggregate, per se, as it is to the particular lags applied to the interest rate and the exchange rate in the investment and trade functions respectively.
In sum it seems likely, given the small effects of exchange
- 38-
rate movement on the demand for monetary assets, that fixing M2 will stabilize output better than more narrowly defined aggregates though this will involve substantial interest and exchange rate variation. However, there is no theoretical presumption that it should dominate a fixed rate regime, though it may do so if there are relatively complex lag
structures in the real side of the model.
-39-
V. Conclusions
Large macro models are complex and cumbersome things. They are often difficult to decipher in a straightforward manner. We have found that it is useful, perhaps necessary, to approach our study of the stabilization properites of the MCM by first using a very small theoretical model to develop our "priors" on how an economy, and thereby an econometric model of it, should respond to a variety of shocks under different policy arrangements. Our purpose has been two-fold. First, we thouciht it possible that by comparing results of MCM simulations with the theoretical results of a small model, we might discover some flaws in the econcmetric model which are not obvious when individual equations are examined in isolation from one another. Indeed some of the specific results discussed in the simulations reflected unanticipated and undesirable interactions between equations. The systemic properties of the nodel, given the perspective afforded by the small model, will lead to scme modifications of the MCM (the interaction between the service flows seasonal dummies and intervention is a case in point).
‘Secondly, and equally important, we hoped the structural and dynamic richness of a large scale econometric model might point to important elements from which the theoretical models have abstracted.
We have seen how important service flows can be when there are either large changes in the stock of international indebtedness or large changes in the interest rates which govern the size of flows of investment payments and receipts. There are also circumstances in which third country effects have been able to explain qualitative differences between the empirical and theoretical models. Similarly, the one period
theoretical models lack the time dimension to encompass overshooting, a
- 40-
property common to most of the reported simulations. More specifically, seemingly small differences in consumption functions--the inclusion of a net worth term in Canada, an inflationary term in Japan and a sterling M3 term in the U.K.--were reponsible for a good deal of diversity among the various country results. In some cases these are features that can be incorporated into a small theoretical model, in others perhaps they are best allowed for by incorporating them into the analysis less
rigorously.
One item of particular note is the discovery of the importance of the precise definition of the monetary aggregate in an open economy. Apparently differences in the definition of money can, in some circumstances, be more important than the choice of regime (fixed aggregates or fixed rates) in stabilizing output.
What has made this project both difficult and challenging is the absence of a small number of generally accepted statistical measures of simulation results. We formulated our experiments in terms of wrether a given financial policy would lead to more or less movement in income than an alternative policy. There are a variety of ways of measuring and describing the behavior of income over various subperiods of the simulation. We have tried to be generous with tables of actual values and a variety of computed statistics and charts while, at the same time, trying to be clear as to our own interpretation of them. We may actually have imposed more order than was warranted.
Given the similar structural and conceptual similarities among the MCM models, there is an amazing amount of diversity in the simulation properties of the various country models 22/
Finally, it seems appropriate to mention potentially useful
-41-
extensions of the project reported here. It would be interesting to let policy makers react to the information content that potential policy variables contain. (e.g., exchange rate and/or interest-rate movements when aggregates are fixed.) More complex yet would be the extension of this study to mixed strategies in the face of uncertainty. A quite separate possibility would be the use of perfect foresight (rational) expectations in simulation. Independent of this project, we have done some preliminary work in this area, and it would be interesting to
incorporate that work in the present study.
-42-
Footnotes
1/_ In particular, see Stevens (1983), Haas and Symansky (1983), Hooper, et. al. (1983) and Quantitative Studies Section (1983).
2/ When referring to "aggregates constant" or "fixed rates" policies, we imply targetting on a predetermined path which involves changes in aggregates or rates over time, but which remain unchanged in the face of real and financial disturbances.
3/ Assuming the country is a net holder of foreign currency assets.
4/ Henderson (1982) demonstrates that a policy conflict between the home and foreign countries arises only in the second case (domestic goods for savings). However, his result depends on the relative size of various elasticities. For example, if the home country's import-income elasticity is sufficiently large and the import-price elasticities are relatively low, then a policy conflict could arise in case 1 and not exist in case 2. While such outcomes are possible, our simulations do not support this scenario.
5/. In the prototype MCM country, all of the aggregates and rates that are fixed are endogenous variables. In order to allow policy makers to completely control the relevant variables, it was necessary to modify the MCM. In order to fix either the exchange rate or the level of international reserves, the behavioral equation depicting central bank intervention was dropped from the model. In the case of fixed exchange rates, this allowed policy makers to intervene as much as necessary in order to reach their exchange rate target. The interest rate on monetary aggregate targets were achieved by allowing the authorities to intervene in the domestic security market. However, owing to peculiarities in the U.K. monetary sector, the discount rate, rather than open market operations, was used as the endogenous policy instrument.
Open market operations are not explicitly modelled in the U.K. monetary sector, the use of the discount rate provides a reasonable “as if" story.
6/ In addition, tax receipts in the U.K. are positively related to official financing. In this simulation, the loss of reserves decreases taxes, increases disposable income and causes consumption to rise.
7/ If the positive elasticity of broadly defined money is sufficiently
Targe, it is possible that the model would be unstable. Specifically, this will be the case if the MM line has more interest elasticity than the XX line.
8/ This implicitly assumes that the demand for broad money while positive, is relatively interest inelastic. If it is very elastic, interest rates will fall and output will rise in the face of an expansionary shock. But the basic point remains: interest rates and output are inversley related.
-43-
9/ For technical reasons the real-side shocks were scaled differently. With M2 exogenous, the necessary interest rate changes for the real side shoc<s were so large the model failed to solve.
10/ while the differences can be pronounced, they are not totally unexpected. See Haas and Symansky IFDP #214.
-44-
Bibliography
Bryant, Ralph C., Money and Monetary Policy in Interdependent Nations, Brookings, Washington, D.C., 1980.
Haas, Richard and Steven Symansky, "Assessing Dynamic Properties of the MCM: A Simulation Approach," International Finance Discussion Paper, No. 214, Federal Reserve Board, Washington, D.C., 1983.
Henderson, Dale W., “The Role of Intervention Policy in Open Economy Financial Policy: A Macroeconomic Perspective," International Finance Discussion Paper, No. 202. Federal Reserve Board, Washington, D.C., February 1982. Forthcoming in Lombra and Witte, editors, The Political Economy of Domestic and International Monetary Relations Ames, Iowa State University Press, 1982.
Hooper, Peter, Richard Haas, Steven Symansky, and Lois Stekler, “Alternative Approaches to General Equilibrium Modeling of Exchange Rates and Capital Flows: The MCM Experience, Zeitschrift fur Nationaloleonomic, 1983.
Jonson, P.D., and R.G. Trevor, “Monetary Rules: A Preliminary Analysis," The Economic Record, Vol. 57, No. 157, 1981.
Poole, William "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model, "Quarterly Journal of Economics, vol. 84, 1970.
Quantitative Studies, "FRB Multicountry Model," Federal Reserve Board, Washington, D.C., 1983.
Stevens, Guy V.G., et. al., U.S. Economy in an Interdependent World: A Multicountry Model, Federal Reserve Board, Washington, D.C.
1984.
A5-
GROSS NATIONAL PRODUCT
_ FOREIGN GOODS/DOMESTIC GOODS SHOCKS
JAPAN PERCENT CHANGE = TITITITTA 0.20
° \ FE INOIA AH O10
CANADA PERCENT CHANGE
0.50
1.00
UK PERCENT CHANGE
0.50
0 | 0.50 1.00 1.50 2.00
1976 1978 1980
oneecseeenenees = FIXED AGGREGATES ------- = FIXED RATES
1976 1978 1980
FIGURE 3
-46-
FOREIGN GNP
FOREIGN GOODS/DOMESTIC GOODS SHOCKS
JAPAN PERCENT CHANGE
0.40
0.20
0
0.20 Us PERCENT CHANGE
3.00
2.00
1976 19878 i980
FIGURE 4
CANADA PERCENT CHANGE
0.10
UK PERCENT CHANGE
0.06 0.04 | 0,02
0
0.02 1976 1978 1980
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GROSS NATIONAL PRODUCT |
DOMESTIC GOODS/SAVINGS SHOCKS
PERCENT CHANGE
CANADA PERCENT CHANGE
PERCENT CHANGE A
“J 0.50
UK PERCENT CHANGE
1.50
1.00
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seteeeec essen = FIXED AGGREGATES ------- = FIXED RATES
1976 1878 1980
FIGURE 5
-56-
FOREIGN GNP
DOMESTIC GOODS/SAVINGS SHOCKS
JAPAN PERCENT CHANGE
0.20
0 10 CANADA PERCENT CHANGE
0.10
US PERCENT CHANGE
0.40
1976 1978 1980
ste teeeeeeeeees = FIXED AGGREGATES ------~— = FIXED RATES
1976 1978 1980
FIGURE 6
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GROSS NATIONAL PRODUCT
SECURITIES SHOCKS
CANADA PERCENT CHANGE “JAPAN PERCENT CHANGE 3 0.05 0 0.05 0.10 oo Oe OO 0 0 0.05 0.01 0.10 0.02 1978 1978 1980 1976 1978 1980
steeeeteee neces = FIXED AGGREGATES = FIXED RATES
FIGURE 7
-66-
_ FOREIGN GNP
' SECURITIES SHOCKS
CANADA PERCENT CHANGE
0.20 0.10 0
0.10 + 0.20
UK PERCENT CHANGE
0.01 1976 1978 1980
JAPAN PERCENT CHANGE
0.02 0.03
GERMANY PERCENT CHANGE
1976 1978
ste eeeeeeaenens = FIXED AGGREGATES ~------ = FIXED RATES
PIGURE 8
-67-
SOU °0- 400 °0- 100 °0- 100°0 ¥00°0 900°0 600°0O L10°0 €10°O S10°:0 £10°O £10°O G10°0 €10°0
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-73-
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WOOHS ALIENDAS -— ATAWWS GOTYSd ANOd ANL 104 dN NOTA
-75-
FOREIGN GOODS/DOMESTIC GOODS SHOCK on GNP (PCER)
FIX RATE Ml EX0G BASE EX0G M2 EXOG
TABLE XZCF PCER. XICF_PCER_ X6CF_PCER_ X7CF_PCER_ CGNP CGNP CGNP CGXP * 75 1 -0.184 -0.165 -0.182 0.123 * 75 2 -0.117 -0.097 -0.109 "-0.132 * 75 3 -0.107 -0.076 -0.095 0.071 TR 4 -0.115 -0.078 -0.097. = =--0.035 * 76 1 -C.113 -0.072 -0.095 0.096 * 76 2 -0.043 * -9.001 -0.023 -0.056 * 76 3 -0.034 0.009 -0.014 -0.001 x 76 4 -0.04 0.007 -0.016 -0.044 * 77 1 -0.039 0.006 -0.015 -0.059 * 77 2 -0.039 0.005 -0.013 0.028 * 77 3 -0.032 0.007 -0.007 -0.001 * 77.4 ~0.032 0.01 — -0.002 © 0.033 * 78 1 -0.019 0.016 0.008 0.02 * 78 2 -0.003 0.026 0.023 0.032 * 72 3 -0. 0.023 0.024 -0.0N4. * 78 4&4 -0.006 0.022 0.027 -0.006 * 79 1 -0.003 0.017 0.027 -0.034 * 7O9 2 -0.004 0.012 0.026 -0.026 x 79 3 -0.011 0.004 0.019 -0.007 * 79 &. -0.027 -0.001 0.016 -0.004 x 80 1 -0.032 . -0.005 0.012 0.002 * en 2 -0.028 -0.006 0.01 0.012 * 80 3 -0.024 -0.006 "0.008 0.021 * 80 4 -0.049 -0.007 0.005 0.006
TABLE 25
-76-
FOREIGN GOODS/DOMESTIC GOODS SHOCK --- FGN? (PCER)
FIX RATE Ml EX0G RASE EXOG - M2 EXOG
— ee
TABLE
XZCF_PCER_ X1CF_PCER_ X6CF_PCER_ X7CF PCER_
FGNP - FGNP FGNP FGNP * 75 1 0.018 0.017° 0.017 0.008 * 75 2 0.004 0. 0.002 -0.027 * 75 3 0.002 -0.003 ~0.001 -0.013 * 75 & -0.013 -0.019 -0.016 ~0.026 * 7 1 -0.016 ~0.022 -0.02 -0.015 * 76 2 -0.014 ~0.017 -0.017 0.009 * 76 3 -0.014 -0.014 -0.016 0.031 * 76 & -0.012 -0.006 -0.009 0.039 * 77 1 ~0.01 0.002 — -0.003 0.041 * 77 2 -0.008 — 0.008 0.001 0.036 * 77 3 -0.007— 0.013 0.005 _ 0.02 * 77 4& -0.007 0.015 | 0.007 0.005 * 78 1 -0.005 0.016 0.009 -0.008 * 78 2 -0.004 © 0.016 0.01 - =0.012 x 78 3 -0.003 0.014 ' 0.01 . 0.011— * 78 & -0.002 0.013 0.011 -0.002 * 79 | -0.002 0.012 0.011 0.007 x 79 2 -0.001 0.009 0.01 0.015 * 79 3 -0.001 0.007 - 0.009 0.018 * 79 & -0.002 0.005 0.008 0.015 * 80 1 -0.003 0.002 0.006 0.006 * 80 2 -0.003 -0. 0.003 -0.003 * 80 3 -0.003 -0.003 ' 0.002 -0.013 * 80 4 -0.004 -0.006 0. -0.017
TABLE 26
TAB).E
++ FF FH Fb HH FH FH FF FH HH OH HF
SFWNPrF PWN WN PWNHkH BPW NH BRWDN Pe
-77-
FOREIGN GOODS/DOMESTIC GOODS SHOCK
FIX RATE
Ml EX0G
BASE EX0G
N2 EXOG
RS (ER)
XZCF_ER_CRS X1CF_ER_CRS X6CF_ER CRS X7CF ER CRS
e
o0go0o0oocoo 00g 0C 000 0000 00 00 0000
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-0. -0.
TABLE 27
{ oo200 000000
13 -0. -0. -0. -0. -0. -0. -0. -0. -0. -0. -0. -005 .012 .01
OL
.012 .009 .001
06
061 059 054 01
008 01. 008 008 007 002
-003
005 004
0.004 -0.004 -0.006 -0.026 -0.029 -0.024
0.002
0.003
0.004 0.002 0.001 -0. ~0.001 -0. QO. 0.001 0.001 0.002 0.001 0.003 0.004 0.004 0.004 0.003
-2.497 1.052 -0.559 0.622 0.144 1.067 -0.042 -0.145 -0.135 -0.872 -0.203 ~9.186 0.219
0.146 —
0.406 0.068 0.081 -0.163 -0.253 -0.153 0.005 0.065 0.027 0.138
chook oe
i i i i i i i a ee ee
PWnNeKH RBWNRM PWN EWN WNP BWDne
-78-
FOREIGN GOODS/DOMESTIC GOODS SHOCK
FIX RATE
XZCF_PCER_
CER
-0. -0. -0. -0. ~0. -0. 044 -024 -O15 -0. -012 -011 -0. -0. -0. -009 -012 -0. -024 ~0. -0. -027 -0. -023
-0 -0 -0
-0 “0
-0 -0
-0
-0
-0
TABLE 28
Ml EX0G
X1CF_PCER_ CER
146 191 185 159 13
081
013
008
004
005
016
029 03
026
BASE EXOG
X6CF_PCER_ CER
-0.062 -0.081 -0.079 -0.078 -0.074 -0.066 -0.041 -0.02
-0.005
. 0.002
0.003
0.001 -0.002 -0.007 -0.012 -0.017 -0.021 -0.023 -0.025 -0.025 -0.025 -0.022 -0.02 -0.019
M2 EX0OG
X7CF_PCER_ CER
~-1.625 -0.796 -0.604 0.082 0.332 0.936 0.688 0.231 -0.1
-0.759 -0.598 -0.187 0.093 0.389 0.361 0.259 0.018 -0.226 -0.314 -0.227 -0.08 0.004 0.11
ER (PCER)
TABLE
+ FF FO HHO OF
EPWNHeR FWHM FWNHR WN PWN WY Pe
-/79-
FOREIGN GOODS/NONESTIC GOONS SHOCK
FIX RATE
M1 EXOG
BASE EX0G
M2 EX0OG
XZCF_PCER_ X1CF_PCER_ X6C™ PCER_ X7CF _PCER cMl rT ~
cy
-0.167 -0.174 -0.213 -0.233 -0.246 -0.224 -0.219 -0.215 ~-9.2
-0..199 -0.198 -0.181 -0.152 -0.13
~-0.113 -C.1
~0.082 -0.072 -0.075 ~0.085 -G, 084 -0.087 -0.093 -0.117
goood o0oovo0o00 D900 D9O90 09090 00 90N 00
TABLE 29
-0.176 -0.172 -0.197 -0.177 -0.164 -0.118 -0.13
-0.131
-0.123.
-0.119 -0.112 -0.091 -0.066 -0.041 -0.023 -0.007 0.01 0.024 -0.026 0.028 0.032 0.032 0.025 0.021
cM1
3.112 0.223 1.228 -0.103 -0.074 -1.455 -0.702 -0.339 -0.138 1.08
0.803 —
0.756 9.191 0.028 -0.503 -0.323 -0.337 -0.022 0.304 0.372 0.211 0.055 0.027 -0.2
Ml (PCER)
TABLE
a a a a ee a ee eS
a a a
* + + HF FH Fb HF HF YF
SFWwWneK SFWNHOeRY FWNHeR KF WHY WDM WDE
FOREIGN GOODS/DOMESTIC GOODS SHOCK ---
FIX RATE
XZCF_ER_ CINTVEN
-0.988 -0.37
-0.299 -0.281 -0.231 ~0.256 -0.261 -0.252 -0.229 -0.218 -0.215 ~0.22
-0.218 -0.244 -0.269 -0.311 -0.33
-0.367 -0.403 -0.463 -0.503 -0.539 -0.571 -0.68
-80-
INTVEN (ER)
M2 EXOG
Ml EXOG = BASE EX0G
X1CF ER. —- X6CF_ER X7CF_ER
CINTVEN = CINTVEN” —s CINTVEN OF 0. 0. Q. 0. 0. 0. 0. 0. 0. QO. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0.
0. 0. 0.
0. 0. 0. 0. 0. 0. 0. ~ 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0. 0.
TABLE 30
-8i -
FOREIGN GOODS/DOMESTIC GOODS SHOCK --- BASE (ER)
FIX RATE Ml EX0G BASE EXOG M2 EXOG
TABLE
XZCF_ER_ YCF_ER_ X6CF_ER_ X7CF ER.
CBASE CBASE CBASE CBASE _ * 75 1 -0.788 0.436 0. 8.375 x 75 2 -0.308 0.172 0. -3.674 & 75 3 0.396 0.158 0. 1.647 * 75 4&4 0.373 ~0.085 0. -2.017 * 76 1 0.51 0.098 0. 1.549 * 776 2 0.52 0.084 O. -2.312 k 76 3° 0.428 0.058 0. 0.267 * 76 & 0.494 0.064 0. 0.519 * 77 21 0.569 0.051 0. 0.224 * 77 2 0.633 0.043. 0. 2.867 * 77 3 0.677 0.03 0. 0.505 x 77 4&4 0.706 0.014 0. 0.596 * 78 21 0.744 -0.015 0. -0.747 * 78 2 6.776 -0.042 0. -0.349 * 78 3 C.778 -0.031 0. -1.408 x 78 & 0.779 -0.037 0. -0.121 * 79 1 0.849 -0.047 0. -0.307 * 79 2 0.918 -0.031 0. 0.608 x 79 3 0.975, 0.002 0. 0.917 x 79 & 1.807 0.001 oO. -0.595 * 80 1 1.366 -9.002 0. 0.375 * 80 2 1.922 0.004 0. -0.376 * 8&0 3 -1.727 0.003 0. 0.281 * §€0 4 2.102 0.001 0. -0.385
TABLE 31
CANADA DOMESTIC GNP FOR THE FOUR PERIOD SAMPLE -
XCP
FX RATE MEAN ” -0.1309 VARIANCE 0.0013 SQDEV 0.0723 ABS . 0.5236
CANADA DOMESTIC GNP FOR THE
XCF FX RATE MEAN 0.0942 ‘VARIANCE 0.0027 SQDEV 0.0897 0.7536 ©
ABS
CAKADA DCMESTIC GNP FOR THE FOLL PERIOD SAMPLE -
XCF
PX RATE MEAN -0.0458 VARIANCE 0.0022 SQDEV 0.1008 ABS
1. 1003
-82-
M1 ExXOG
-0. 1045 0.0017 0. 0488 0.418
EIGHT PERIOD SAMPLE -_
81 EXOG
-0.0594 0.0037
0.0542 0.508
B1 EXOG
-0.0147 0.0023 - 0. 0569 0.6818
TABLE 32
BASE EXOG
-0. 1207: 0.0017 0.0633 0.4826
BASE EX0OG
-0.0788 0.0034
0.0732 0.6302
BASE EXOG
-0.0193 0.003 0.0779 0.8722
POREIGN
M2 EXOG
0.0065 0.0129 0.0389 0. 3616
M2 EXOG
-0.0086 0.0062
0.044 0. 4682
POREIGN
82 EXOG
-0.0023 0. 0023 0. 0533 0.764
FOREIGN
SHOCK
SHOCK
SHOCK
CANADA FOREIGN GNP FOR THE PF
XCF FX RATE MEAN 0.0029 VARIANCE 0.0002 SQDEV 0.0005 ABS 0.0373
CANADA OREIGN GNP FOR THE EIGHT PERIOD SAMPLE -
XCF
PX RATE MEAN -0.0056 VARIANCE 0.0002 SQDEV 0.0013 ABS 0.0933
OUR PERIOD SAMPLE -
81 EXOG
-0.0014 0.0002 0.0006 0. 0387
M1 EXCG
-0.0081 0.0002 0.0017 0.0979
FOREIGN
BASE EXOG M2 EXOG 0.0003 -0.0145 0.0002 0.0003 0.0006 0.0016 0.0366 0.0743 FOREIGN
BASE EX0G M2 EXOG -0.0077 0.0008 0.0002 0.0006 0.0016 0.0044 0.0994 0. 1678
CANADA VYOREIGN GNP FOR THE FULL PERIOD SAMPLE - FOREIGN
_ XCF FX RATE
MEAN -0.0046 VARIANCE 0.0001 SQDEV 0.0017 ABS 0.159
M1 EXCG
0.0024 0.0001 0.0033 0.2379
TABLE 33
BASE EXOG M2 EXOG 0.0015 0.0043 0.0001 0.00048 0.0025 0.0095 0.2048 0.3961
SHOCK
SHOCK
SHOCK |
~84-
DOMESTIC GOODS/SAVINGS
CANADIAN SHOCKS
GNP PERCENT CHANGE . INTEREST RATE ABSOLUTE CHANGE
0.40 0.20
0.20
0.40 0.60
ABSOLUTE CHANGE
18976 1978 1980 1976 1978 1980
FIXED RATE
Mi EXOGENOUS | BASE EXOGENOUS eee = Me EXOGENOUS
FIGURE 10
MM * BOM OM
a i a a a Sr
mWhr PWHPwe RW te PWN Whe wl re
DOMESTIC GOOES/SAVINGS SHOCK
FIX. RATE
-85-
Ml EXOG
BASE EX0G
CGNP (PCL)
K2 EXOG
X%ZCD_PCEK_ X1CD_PCER X6CD PCER_ X7CD_PCER_
CGNP
0.247 0.186 0.133 06.169 c.092 0.042 0.011 -0.004 -0.011 -0.017 -0.026 -0.044 -G.057 -0.08
-0.083
-0.098
-0.094 -0.09} -0.082 "-0.095 -U.091 -0.079 -0.065 -0.091
CGKP
0.
QO. oO.
C.
0.
0. -0. -0. -0. -0. -0. -0 -O.
228 167 108 O82 66
0C6 025 036 036 035 033
034
638
047 - 039 032 -022 -012 -001 -009 O18 621 -02
-02
CGNP
0.246 0.187 0.136 C.11k 6.692 C.041 0.013. -0. -0.007 -0.011 -0.017 -0.024 -0.036 -0.054 70.C55 -0.055 -0.051
-0.046 -
-0.035 -0.027 -C.617 -0.011 -0.005
6.001
TABLE 38
CGNP
-0. QO. -O. -116 - 006 -117 057 +122 +156 1 -013 1 - 038 -O17 C52 048 +085 O68 7G) 1 -o. -0. io Os -0. -0.
596 322 159
025 25 038
0C1
-86- .
DOMESTIC GOODS/SAVINGS SHOCK --- FGNP (PCER)
FIX RATE M1 EXOG BASE EXOG M2 EXOG
TABLE XZCD PCER X1CD PCER X6CD PCER X7CD PCER FGNP FGNP .— FGNP FGNP * 75 1 0.016 C.016 0.015 0.036 * 75 2 0.02 0.023 0.021 0.092 * 75 3 0.021 0.024 0.021 0.043 * 75 & 0.022 0.024 0.02 0.025 * 76 1 0.018 0.018 0.016 -0.029 * 76 2 9.012 0.009 0.009 -0.078 * 7h 3 0.006 -0.001. 0.001 -9.113 * 76 & 9.091 -0.011 -0.005 -0.11 * 77 1 -0.002 -0.017 -0.009 -0.087 * 77 2 -0.005 -0.021 -0.011 -0.052 * 77 3 -0.006 ~0.022 -0.011 -0, * 77 4 -0.008 -0.022 -0.011 0.034 * 78 1 -0.009 -0.022 -0.012 0.958 * 78 2 -0.01 -9.019 -0.011 0.06 x 78 3 -0.012 -0.017 -0.01 0.043 * 72 & -0.016 -0.014. -0.01 0.013 * 79 } -0.017 | -0.01 -0.009 -0.008 * 79 2 -0.018 -0.005 -0.006 0.024 * 79 3 -0.018 0.001 -0.004 -0.026 * 79 & -0.019 0.008 -0. -0.012 * 80 1 ~-9.019 0.013 0.003 0.008 x 80 2 -0.016 0.019 0.008 0.031 * 80 3 -0.014 0.022 0.011 0.044 * 80 4 -0.014 0.023 0.012 0.045
TABLE 35.
Moo bs
*
a Se
a et
oe
Pid
+e SEH EEK
RW PONE RW NP RWHP WN Bw
-87-
DOMESTIC GOODS/SAVINGS SHOCK
€IX. RATE
Ml EXOG.
EASE EXOG
CRS (ER)
M2 EXOG
XZCP_ER_ ChE NICE_ER_CRS N6CP_ER CRS NX7CP_ER CRS
co
occo0coosc
Oooo eke) *. 8 ee @ # @
Poe . 8 6
D7 Oo
0.157 0.134 0.124 0.091 0.07 0.045 0.027 0.01
-0.00)
-C.004
-0.003 -
-6.012
-0.022
-0.031
-0.0625
-0.024
-C.023
-0.017.
-0.603 ¢.00)
-6.00) G.602 0.011 0.011
TABLE 36
ir OO97000
-0
-0
O12 012 -O11 045 045 042 -O1
.007
.605 ~
. 036 .007 -Q07 -007 -005 004 .0Q03 003 002 -002 008
1.01
CO) . 608 - 006
_ 6.735 -3.438 0.489 -2.479 -0.826 ~1.366 0.509 0.602 0.26€ 2.05 0.104 0.263 -0.685 -0.625 -C.946 -0.013 0.095 0.432 0.547 G.193 “0.082 “(2.3264 -C.086 -9.276
-88-
DOMESTIC GOODS/SAVINGS SHOCK --- CER (PCER)
FIX. RATE Ml EX%0G BASE EXOG M2 EX0G
wee ewe ee “eee we mee ee ee eS oe oe
TABLE
XZCD,PCER_ XI1CD PCER_ X6CD_PCER X7CD PCER CER CER CER 7 CER 7 * 75 1 0. 0.085 -0.C07 4.317 x 75 2 0. 0.138 -0.019 1.532 * 75 3 0. 0.15 -0.032 0.415. * 75 4&4 0. 0.12 -0.022 -1.665 x 76 1 0. 0.075 -0.013 -2.133 * 776 2 0. 0.026 -0.01 -2.273 *- 76 3 - QO. -0.014 -0.029 -1.085 * 76 40 0. -0.044 -0.046 0.206 * 77 1 0. -0 064 -0.057 0.687 * 77 2 0. -0.072 -0.059 1.874 * 77 3 0. -0.069 -0.055° 1.536 —* 77 ~ 4 0. -0.066 -0.048 0.953 x 78 1 0. -0.066 -0.041 -0.04 x 78 2 0. -0.067 -0.034 -0.729 * 78 3 0. -0.061 -0.027 -1.255 * 78 4 0. -0.048 -0.019 -0.947 * 79 1 0. -0.037 ~0.012 -0.449 + 79 2 0. -0.025 -0.006 0.137 + 79 3 0. -0.01 -0.002 0.594 e 79 4 0. 0.902 -0.004 © 0.617 * g0 1 0. 0.003 © -0.008 0.334 * g0 2 0. -0.004 -0.016 -0.084 * 89 3 0. -0.007 -0.021 -0.231 x 80 4 0. -0.015 -0.024 -0.372
TABLE 37
TALLE
eRe ER WYY 4 YE tH EHH ee HH EHH EY OD
75 75
75 76
ew ee ee SS OM C DON N SEO GB
aw ~r Sf ss O00 wWwro
ise) oO
mm Qo
rao
SWhe EP WHY FPWHeY RWHP coho BW bh Se
DOMESTIC GOORS/SAVINGS SHOCK
FIX. RATE
——-——__
M1 EXOG
-89-
BASE EXx0G
Cil (PCER)
M2 EXOG
X2CD_PCER_ NICD PCER_ X6CP_PCER x7C
Cy.
0.207 0.292 0.367 0.357 0.341 0.334 0.311 0.26
G.202 0.161 0.127
0.068:
0.012 -G.05 -0.096 -G.141 -0.177 -0.222 -0.246 -C.277 -0.3 9.316 -%.308 -5.32
Cx)
cNI
0. 6) QO. 0 0. 0 O. 0 QO. 0 Cc. 6) C. 0 0. @) O. 0 QO. 0 0. 0 0. C O. 6) 0. -0 G. -0 0. -0 Q. > -C. QO. -0 QO. -U 0. -0 GC. -C Oo. -9 we -0 Cc. -9 TABLE 38
-191 -268 -336 -28
-241 -212 -219 -19
-151
»124
101 -C61 O17 028 -C57 677 O99
122 |
-124 -107 097 -087 065 046
Cc
DA oe ©, OAM CA a)
Pe ee ee oe ee i
wommammn nan nas
spss TEEN OSE SENOS ONS RWNY EWP RWNP PWN WD PWN
cw on @ O00 Mw wo SID
-90-
DOMESTIC GOODS/SAVINGS SHOCK --- REV_COKFAFL (ER)
FIX RATE Ml EXOG BASE EXOG M2 EXOG
XZCD ER. = - MICD ERs XGCD_ ER. X7CD_ER_ REV CDYFAFL REV_CDNFAFL RFV CDNFAFL REV CPNFAFL
-0.199 0. 0. 0 -0.266 0. 0. 0 -0.2€6 0. 0. 0 -0.334 0. 0. 0 -0, 382 0. 0. 0 -2. 402 0. 0. ) -9.408 0. c. G -0.436 G. 0. 0 -0.459 0. 0. C -0.488 0. 0. 0 -0.501 0. 0. 0 -9.529 0. 0. 0 -0.531 0. 0. 0 -0.525 0. 0. 0 -0.524 0. 0. 0 -0.548 0. 0. 0 -0.541 0. 0. 0 -0.556 0, 0. 0 -0.56€ 0. 0. 0 -0.623 G. C. C -0.665 0. 0. C -9.681 G. c. 0 -0.68 0. 0. 0 -0.804 0. 0. 0
TABLE 39
CANADA DOMESTIC GNP FOR THE FOUR PERIOD SAMPLE - DOMESTIC SHOCK
-9]-
XCD FX RATE M1 EXOG BASE EX0G M2 ExOG MEAN 0.1689 0. 1465 0.17 -0.0793 VARIANCE 0.0038 0.0042 0.0036 0. 1576 - SQDEV a 0.1254 0. 0986 0.1265 0.498 _ ABS 0.6756 0.586 0.6802 1. 1932
CANADA DOMESTIC GNP FOR THE EIGHT PERIOD SAMPLE -
XCD
FX RATE MEAN 0.102 VARIANCE 0.0075 SQDEV 0.1357 ABS 0.8245
CANADA DOMESTIC GNP FOR THE FULL PERIOD SAMPLE -
XCD
FX RATE MEAN -0.0119 VARIANCE 0.0096 SQDEV 0.2243 ABS 1.9258
M1 EXOG
0. 0738 0. 00 86 0.1041 0.7122
B1 EXOG
0.0146 0.0049 0.1173 1. 1298
TABLE 40
BASE EXOG
0.1032 0.0074 0. 1368 0.8257
BASE EX0OG
0.0156 0.0065 0.1552 1.278
DOMESTIC SHOCK
M2 EXOG
-0.0019 0.0757 0.5297 124948
DOMESTIC SHOCK .
M2 Ex0G
0.0019 0.0259 0.596
2.2757
-92-
CANADA FOREIGN GNP FOR THE FOUR PERIOD SAMPLE - DOMESTIC SHOCK
xCD
FX RATE M1 EXCG BASE Ex0G M2 ExOG MEAN 0.0196 0.0217 0.019 0. 0488 VARIANCE 0. 0. 0. 0.0009 SQDEV 0.0016 0.0019 0.0015 0.0122 ABS 0.0785 0.0868 — 0.0761 0. 1952
CANADA FOREIGN GNP FOR THE EIGHT PERIOD SAMPLE - DOMESTIC SHOCK
xcD FX RATE M1 EXOG BASE EXOG M2 EXOG BEAN 0.0145 0.0128 0.012 -0.0168 VARIANCE 0.0001 0.0002 0.0001 0.006 SQDEV 0.0021 0.0025 0.0018 0.0439 ABS 0.1161. 0. 1261 0.1062 0.5248 CANADA POREIGN GHP FOR THE FULL PERIOD SAMPLE - DOMESTIC SHOCK - XCD FX RATE Si EXOG BASE EXOG S2 EXOG MEAN -0.0037 0.0008 0.0012 -0.0003 VARIANCE 0.0002 0.0003 0.0001 0.0031 SQDEV 0.0051 0.0072 0.0032 0.0708
ABS 0.3202 0. 3812 0.24485 1.0711
TABLE 41
-93-
CANADIAN SECURITIES SHOCKS
GNP ' PERCENT CHANGE
2.00 1.50 -
1.00 0.50 0
0.50 1.00
25 0 25
188
73
u 1 PERCENT CHANGE ae -| 8.00
6.00 4,00 2.00
1976 1978 1980
2.00 4.00
6.00
EXCHANGE RATE PERCENT CHANGE
2.00 - 1.00
1.00 2.00 3.00
0.20 0.10 O
0.10
0.20 1976 1978 i980
= FIXED RATE = M! EXOGENOUS
ween eeeene: = BASE EXOGENOUS
FIGURE 11
rer = M2 EXOGENOUS
75 15 75 76 76 76 76
77 77 76 78 TE 7€ 79 79 79 79 e0 6Q eC e0
bw RW ~~ Pwnre
WN FW NM DS ton
SECURITY SHOCK
FIX. RATE
-94-
M1 EXOG
CGSP (PC
EASE EXOG
XZCS PCER_ X1CS_PCER_ X6CS_PCER_
CGKP
-0, -0. -G. -0. .549 458 -0.
a)
-0
-0
~U.
-0
OE OE i Te OR OE ORO)
141 549 618 518
539
397 -0. -0. -G. C06 .057 095 2177 | 598 . 5 8& »652 -697 - 186 «252 -102 834 -627
391 304 308
CGXP
-0
-0. -0. -C. -C. -0.
-G -0
-C. -0. -Cc.
we 3
n
-O. -C. “U. -C. -0. -C. -0.
TABLE 42
-22 754 87 858
-753 -701 631 575 556
Eat ae}
-0.
-0. -0. -0.
464 26S 251
G22, 736 |
CGhP
-0.182 -0.78 -0.933
0.922 -0.902
-0.84)
-0.927 -0.912 -0.878 -0.846 -0.862 ~S.E5E -0.€)1 -0.71
-0.627 -C.582 -0.52
~0.449 -0.434 -0.411 -0.408 -0.345
-0.229
-0.301
EK) Teas
i2 EYOG
X7CS_PCER_ CGNP
-0.184 0.005 -0.176 -6.03€ -0.C75 -0.015 -0.015 -0.088 -0.115. -0.218 -0.C72 -O.C09% 0.006 0.095 O.074 9.959 -¢€.013 -0.064 -0.08! -0.025 -0.081 -0.039 0.003 -0.
TATLE
aT 78 758 75
78
a es
PWNHeY hBWNHPR wih RFPWwWhNOeY BRWHK DWN
SECURITIES
FIX RATE
FGNP
-0.009 -0.039 -0.059 -0.074 -0.082 -0.08 -0.082 -0.073 -0..065 -0.053 -0.047 -0.029 ~C.018 0.001 0.015 - 0.059 0.082 0.108 0.128 0.182 9.214 U.219 0.203 0.246
-95-
SHOCK atatad
Nl EXOG BASE EX0G
FGNP
0.029
0.026
0.001 -0.025 -0.044 -0.069 -0.058 -0.127 -0.142 -0.152 -0.159 -0.156 -0.144 -0.121 -0.1 -0.079 -0.055 -0.033 -0.021 -0.013 ~-0.019 -0.014 -0.017 -0.024
TABLE 43
XZCS PCER X1CS_PCER_ X6CS_PCER_ X7CS_PCER
FGNP
0.028
0.023:
0.002 -0.018 ~0.035 -0.06 -0.091 -0.124 ~0.148 -0.165 -0.18° ~0.187 -0.184 -0.167 -0.151 -0.137 0.114 -0.091 -0.077 -0.064 -0.063 -0.048 -0.042 -0.038
FGNP (PCER)
M2 EXOG
FGuP
9,028 -0.005 -0.084 -0.118 -0.126 -0.093 -0.043 0.018 0.074 0.107 0.11 0.08 9.039 -0.008 -0.045 -0.054 -0.044 -0.015 0.018 0.041 0.043 0.043 0.027 0.006
-96-
SECURITY SHOCK --- CRS (ER)
FIX. RATE Ml EXO0G EASE EX0G 212 EXOG
x + S hw BB kX
TADLE %ZCS_ER_CkS X1CS ER CRS X@CS ER CRE X7CS ER CRS * 75 X G. -G.008 -0.317 -6.3
* 75 2 C. -0.379 -6.059 6.436 * 75 3 0. -0.539 -0.045 -3.336 x 75 & 0. -0.573 -0.26 -2.582 * 776 1 QO. -0.568 -0.331 -0,.287 * 76 2 0. ~0. 586 ~0.38 0.763 *. 76 3. C, -0,665 -0.23) 0.201 * 76°44 0. -0.619 -0.205 0.446 % 77 1 0 -0.581 -0.172 -0.684 77°=« «2 G. -0.586 — -G.163 = --0.775 77=3—- QO. -0.601 -0.165 - =-2.601
77 4 C. -0.578 ~0.157 -1 .871
78 1 CG. -0.52 -0.151 -1.86
7B 2 0. -0.46 -0.142 -1.59
78 2 ( -0.418 -0.13 ~0.52
738 4 0. -0.394 -0.119 -0.235
* 79 Cc. -C.339 -C.106 -0.17 * 79 2 0. -0.265 — -(.067 - =0,382 * 79 2 Cc. -0.266 -0.09 -2.20! * 79 4 0. -0.275 -0.262 -1.633 + §& 1 0. -0,301 0.295 -).781 * 86 2 oO. -0.274 -0.296 -1.185 * @0 3 0. -0.286 -0.269 — -0.856 + 80 4 CG. -6.311 -0.274 -0.596
TABLE 4&4
-97-
SECURITY SHOCK _ --- CER (PCER)
FIX. RATE Ml EXOG BASE EXOG- 2 EXOG
wee ee m+ eee ee + ee ee ——
TABLE XZCS_PCER © X1CS_PCER_ X6CS PCER X7CS PCER CER CER CER CER ~ * 75 1 v0. 1.851 1.652 , 1.663 * 75 2 QO. 2.101 2.131 ~1.865 * 75 3 0. 1.641 2.039 -3.46 x 75 4 QO. 1.092 1.628 -3.472 * 76 1 0. 0.706 1.212 - -1.648 * 76 2 QO. 0.47 0.884 0.631 * 76 3 QO. .0.289 0.769 1.733 + 76 & 0. 0.198 0.748 | 2.15 * 77 0. 0.18 C.767 1.438 * 77 2 0. 0.169 0.773. 0.589 x 77 3 0. 0.146 0.757 -1.127 x 77 & 0. 0.133 0.73 -1.966 -* 78 | 0. 0.151 0.703 -2.235 * 78 2 0. 0.187 0.675 . -2.077 * 78 3 0. 0.22 0.644 ~1.187 * 78 4 0. 0.23 0.615 -0.265 k 679 «(4 0. 0.238 0.589 0.35 + 79 2 0. 0.253 0.547 0.488 ry 79 3 O. 0.228 0.488 -0.102 + 79 4&4 6. 0.156 0.313 -0.95 > 80 1 0. G.046 0.124 ~1.65 + eg Cc. -0.05 -0.037 -1.694 + 8 3 0. -0.141 -0.155 ~1.364 t+ §0 4 0. -0.226 -0.213 -0.879
TABLE 45
* .98-
SECURITY SHOCK “oo Cul (PCER)
FIX. RATE Ml EXOG | BASE EXOC M2 EXOG
TALLE
XZCS_PCER_ XICS_PCER_ XGCS PCER_ X7CS_PCER_
cil Cx — exy eM * 75 1 -0.109 0. 0.408 0.385 x 75 2 -0.511 0. -0.202 §.321 * 75 3 -0.868 0. -0.774 8.788 * 75 & -0.945 C. -0.839 | 8.375 * 76 1 -1.035 0. -C.853 5.536
4 76 2 -1.148 6. -0.939 3.143 + 76 2 -1.366 6. -1.403 2.318 * 76 4 -1.334 0. -1.645 — 1.06 + 77 i -1.306 0. -1.784 1.72) x 77 2 -1.27 O. -1.981 1.929 x 77 3 -1.312 0. ~2.245 4.833 x 77 4 -1.024 0. -2.271 4.994 *° 78 1° -0.882 0. -2.225 5.347 * 78 2 -0.668 Q. -2.272 5.565 * 78 3 -0.436 C. -2.272 4.242 * FE 4 (6077 G. -2.189 3.079 $ 7G | 0.344 O. -2.071 2.345 6 75 2 0.746 Q. -2.049 2.25 + 79 23 1.157 0. ~2.024 3.317 * Fy & 1.908 QO. -1.674 ‘4.505 + €5 7 4.37] CG. -1 388 5.445 ¥ 30 2 2.743 CO. -1.121 5.274 ry +0 3 2.879 CG, -0.901 4.923 x Le 4 3.72 C. 0.734 4.037
TABLE &6
ant
te.
75. 75 75 75 7€ 76 76 76 77 77 77 77 78 78 78 78 75 79 79 79 8&0 €9 80 &0
& wt +
IrWwhy BW BS Ww pH mvt! WP we
~99-
SECURITY SHOCK --- REV CDNFAFL (E28)
FIX RATE Ml EX0G BASE EX0G M2 EX0G
mae CF ~~ ee oe eee
N2CS_ER = X1CS_ER| —- X6CS._ER_—sXTCS_ER REV CDNFAFL REV _CDNFAFL REV CDNFAFL REV CDNFAFI. 28.6289 0. 0. 0 11.379 0. 0. 0 10.692 0. 0. 0 10.727 0. 0. 0 10.245 0. 0. 0 10.098 0. 0. C 9.816 0. 0. ) 9.838 0. 0. 0 9.688 0. 0. 0 9.808 0. 0. 0 9.812. 0. 0. 0 10.3 0. 0. 0 10.295 0. 0. 0 10.744 oO. 0. 0 11.026 0. 0. 0 12.143 0. 0. 0 12.332 0. 0. 0 13.046 0. 0. C 13.728 0. 0. C 25.384 0. 0. 0 16.254 0. 0. C 16.834 0. 0. 0 16.909 0. 0. 0 20.058 0. 0. 0
TABLE 47
-100-
CANADIAN INTERVENTION * NADIA N, ABSOLUTE CHANGE
30
20
10
DOMESTIC GOODS/SAVINGS
0.00
0.50
1.00
1976 1978 1980
* FIXED RATE SHOCKS
‘FIGURE 12
-101-
CANADA DOMESTIC GNP FOR THE FOUR PERIOD SAMPLE - SECURITY SHOCK
xcs
FX RATE H1 EXOG BASE EXOG 42 EXOG MEAN -0.4563 -0.6755 -0.7041 -0.0983 VARIANCE ~~ 0.046 0.0947 0.1261 0.0093 SQDEV 0.9707 2. 1093 2.3616 0. 0664 ABS 1.8251 2.702 2.8166 0.4027 CABADA DOMESTIC GNP FOR THE EIGHT PERIOD SAMPLE - SECURITY SHOCK Xcs
FX RATE M1 EXCG BASE EXOG 42 ExoG MEAN -0.471 -0. 7142 -0.7998 -0.0733 VARIANCE 0.0222 0. 04 34 0.0651 0.0053 ' SQDEV 1.9301 4.3881 5.573 0.0802 ABS 3.7681 5.7133 6.3982 0.5957
CANADA DOMESTIC GNP FOR THE FULL PERIOD SAMPLE - SECURITY SHOCK
xcs
FX RATE M1 EXCG BASE EXOG M2 EXOG KEAN 0.1634 -0.4756 -0.657 -0.0505 VARIANCE 0.4708 0.057 0.0602 0.006 SQDEYV 11.4696 6.739 11.7448 0.1994
ABS 13-6988 11.4137 15.7689 © 1.6968
TABLE 48
-102-
-CANADA FOREIGN GNP FOR THE FOUR PERIOD SAMPLE -
xcs FX RATE MEAN -0.0453 VARIANCE 0.0008 SQDEV 0.0106 ABS 0.1812
CANADA FOREIGN GNP FOR THE EIGHT PERIOD SAMPLE -
xcs
FX RATE MEAN -0.0623 VARIANCE 0.0007 SQDEV 0.0358 ABS 0.4985
M1 EXOG
0.0077 0. 0006 0.0021 0. 0803
‘1 BXOG
-0. 0383 0.0032 0.0344 0.48174
BASE EXOG
0.0088 0.0004 0.0016 0.071
BASE EXOG
-0.0345 0.003. 0.0303 0.3821
CANADA FOREIGN GNP FOR THE FULL PERIOD SAMPLE -
xcs
FX RATE MEAN 0.0312 VARIANCE 0.0126 SQDEV 0.3138
ABS 2.1682
B81 EXOG
~0. 0648 0.0037 0. 1851 1.6655
BASE EXOG
~0. 0888 0.0044 0.2906 2.2371
TABLE 49
SECURITY SHOCK
M2 EXOG
-0. 0446 0. 0046 0.0217 0. 2339
SECURITY SHOCK
M2 EXOG
-0.0528 0.0037 0.0484 0.5186
SECURITY SHOCK
M2 EXOG
-0.0001 0.0043 0.0991 1.2675
Cite this document
Federal Reserve (1983, November 30). Alternative Financial Strategies: The Results of Some Policy Simulations with the Multi-Country Model. Ifdp, Federal Reserve. https://whenthefedspeaks.com/doc/ifdp_1983-235
@misc{wtfs_ifdp_1983_235,
author = {Federal Reserve},
title = {Alternative Financial Strategies: The Results of Some Policy Simulations with the Multi-Country Model},
year = {1983},
month = {Nov},
howpublished = {Ifdp, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/ifdp_1983-235},
note = {Retrieved via When the Fed Speaks corpus}
}