Knowledge that Transforms

For the last twenty years economists have debated the advantages of free and fixed exchange-rate regimes. Milton Friedman argues that if internal prices and wages were inflexible, it would be preferable to allow adjustment to occur through a depreciation of domestic currency. Svend Laursen and Lloyd Metzler, Egon Sohmen, and Murray Kemp argue in favor of free (floating) exchange rates by the familiar insulation properties of free rates. Jerome Stein classifies a conflict (compatible) economy as one in which a decline in output is accompanied by an excess demand (supply) of foreign exchange. When output falls for a compatible economy in a free (fixed) exchange-rate regime, the resultant appreciation of domestic currency (increase in the level of money balances) tends to reinforce (mitigate) the initial decrease in output. When output falls for a conflict economy in a free (fixed) exchangerate regime, the resultant depreciation of domestic currency (decrease in the level of money balances) tends to mitigate (reinforce) the initial decline in output. Stein then concludes that a free (fixed) exchange-rate regime is optimal for the conflict (compatible) economy. There are two major shortcomings of previous comparisons of different exchangerate regimes: the first is the lack of disequilibrium behavior. In this paper, I develop a disequilibrium model for the analysis.' It will be assumed that the money wage adjusts slowly and transactions can occur at labor market disequilibrium. Unemployment gein erated from this type of economic behavior is typically involuntary. The second shortcoming is that the results are limited to static short-run comparisons. Most of the previous analyses are based on the standard Keynesian variable income model with rigid wages and prices.2 Though wages and prices may be considered as fixed in the short run, they must adjust in the long run. In the literature, these long-run aspects have never been satisfactorily analyzed.3 Indeed, this leaves a good part of the problem out of the picture. In order to evaluate the overall efficiency of exchange-rate regimes, in addition to short-run comparisons, we should also consider the shapes (or speeds of adjustment) of long-run time paths of different exchangerate regimes. To overcome these setbacks, I construct a disequilibrium model that traces out the long-run time path of different exchange-rate regimes. Not only will the short-run comparative statics be considered, but also the long-run adjustments of those sticky prices. My analysis shows that Stein's classification can be extended to a long-run dynamic framework. For a conflict (compatible) economy, a free (fixed) exchange-rate regime is superior to a fixed (free) exchange-rate regime, even though the latter regime may have a faster speed of adjustment than the former. In Section I, the analytical framework of the model is developed. Section II analyzes the short-run level of unemployment for each exchange-rate regime; and Section III is an examination of the long-run time paths for

Any paper on U.S. monetary reform must consider reform of the Federal Reserve System. This paper considers reforms of the Federal Reserve that should enhance the quality of monetary policy. Two kinds of reforms are considered: 1) changes in the internal institutional structure of the Federal Reserve that should enhance the quality of its monetary policy decisions; 2) changes in the powers of the Federal Reserve to impose reserve requirements that should enhance the efficacy of the policies themselves.

Jerome Stein (1961, 1964) published a porttolio selection model of individual discretionary hedger decision making in a futures trading context, and used this model as a basis for his theory of the simultaneous determination of spot and futures prices. While this model has several limitations (see for example the author and Basil Yamey), it is the purpose of this note to show that it does not have the deficiency attributed to it by Richard H. Snape, who argued that Stein's neglected substitution effect, when accounted for, gives rise to the possibility of an unstable storage market equilibrium. Stein's model determines the proportion of stock to be hedged for a risk-averse individual whose assumed aim is maximization of expected utility. The expected return equations are