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The New Nexus among Trade, Industrial and Exchange-Rate Policies

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  • J. David Richardson
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    Abstract

    This paper explores the new interconnections between real and financial policies that affect international transactions. Among other conclusions are the following. (1) In a world of spatially mobile capital and reasonably accurate expectations, trends in international competitiveness and financial asset yields are tightly linked. Volatility in one causes volatility in the other. Policies that affect one affect the other.Financial policy influences real exchange rates and alters the pressures for trade and industrial policy. Trade and industrial policy causes overshooting of financial variables, and alters the pressures for financial policy.(2) Any failureto make real and financial policy stable, credible,systematic, and predictable generates volatile and costly signals to reallocate resources. The problems with this are unpredictability more than inefficiency and resource disorder more than resource mis-order.(3) Stable, credible, systematic, and transparent exchange-rate policy can allay resource disorder by limiting deviations around economic trends.Economic trends can be enhanced in the presence of well-defined market imperfections by stable, credible, systematic, and transparent trade and industrial policies. (4) To reduce the likelihood of global resource disorder, real and financial policy options may involve retreating from multilateralism and from unrealistically binding rules. Sensible and timely alternatives seem to be aggressive bilateral peacemaking, non-inclusive coalition formation, and the formulation of credible "conventions" to govern government policy, both real and financial.

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    File URL: http://www.nber.org/papers/w1099.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1099.

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    Date of creation: Mar 1983
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    Publication status: published as From The Future of the International Monetary System, edited by Tamir Agmon , Robert G. Hawkins, and Richard M. Levich, pp. 253-279. Lexington, MA: Lexington Books, D.C. Heath and Company, (1984).
    Handle: RePEc:nbr:nberwo:1099

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    1. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    2. Wilson, Charles A, 1979. "Anticipated Shocks and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 639-47, June.
    3. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    4. Susan Schadler, 1977. "Sources of Exchange Rate Variability: Theory and Empirical Evidence (Sources des variations de taux de change: analyse de la théorie et observation empirique) (Fuentes de variabilidad del tipo de c," IMF Staff Papers, Palgrave Macmillan, vol. 24(2), pages 253-296, July.
    5. Jonathan Eaton & Gene M. Grossman, 1985. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," Canadian Journal of Economics, Canadian Economics Association, vol. 18(2), pages 258-72, May.
    6. Eichengreen, Barry J., 1983. "Effective protection and exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 2(1), pages 1-15, April.
    7. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
    8. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    9. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    10. Richardson, J. David, 1982. "Four observations on modern international commercial policy under floating exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 16(1), pages 187-220, January.
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