Waterloo economics series | 2000

Abstracts of working papers

#0001 -- David Andolfatto, Scott Hendry, Kevin Moran, and Guang-Jia Zhang (June 1999, revised January 2000)

Persistent liquidity effects following a change in monetary policy regime (PDF)

Abstract

We develop an equilibrium model of the monetary transmission mechanism that highlights search frictions in the market for labour and information frictions in the market for money.
 
A change in monetary policy regime, modelled here as an exogenous reduction in the 'long-run' money growth rate target, results in a large and persistent increase in the interest rate owing to a persistent shortfall in liquidity. This persistent 'liquidity effect' arises because of the limited information that individuals have concerning the nature of the shock, which implies that individuals optimally update their inflation forecasts using an 'adaptive' expectations rule. The subsequent period of high interest rates curtails job creation activities in the business sector, making it more difficult for the unemployed to find suitable job matches; employment bottoms out two to three quarters following the shock. In the long run, however, employment rises above its initial level, primarily because of the lower long-run interest rates associated with a tight-money regime.
 

#0002 - Ayoub Yousefi - February 2000

Merchandise trade balances of less developed countries and exchange rate of the U.S. dollar: cases of Iran, Venezuela & Saudi Arabia

Abstract

This study examines the effects of changes in the exchange rate of the U.S. dollar on the trade balances of three oil-exporting countries, Iran, Venezuela, and Saudi Arabia. An exchange rate pass-through model is applied to allow changes in the exchange rate of the dollar to affect prices of traded goods. We found that changes in the effective exchange rate of the dollar pass through partially to these countries' import prices. For the export prices, under the floating exchange rate system depreciation of the dollar was found to cause export prices of these countries (except Saudi Arabia) to rise. While changes in the exchange rate of the dollar influence these countries' trade balances, the long-run trade balance adjustments seem to follow different patterns and time profiles.