Hombu g, S e an
A icle
Some No es on O e shoo ing
Zei sch i ü Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de
Gesellscha ü Wi scha s- und Sozialwissenscha en, Ve ein ü Socialpoli ik
P o ided in Coope a ion wi h:
Duncke & Humblo , Be lin
Sugges ed Ci a ion: Hombu g, S e an (1989) : Some No es on O e shoo ing, Zei sch i ü
Wi scha s- und Sozialwissenscha en (ZWS) - Vie eljah essch i de Gesellscha ü Wi scha s-
und Sozialwissenscha en, Ve ein ü Socialpoli ik, ISSN 0342-1783, Duncke & Humblo , Be lin, Vol.
109, Iss. 3, pp. 443-447,
h ps://doi.o g/10.3790/schm.109.3.443
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/291713
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Zei sch i ü Wi scha s- u. Sozialwissenscha en (ZWS) 109 (1989), S. 443 - 447
Duncke & Humblo , Be lin 41
Some No es on O e shoo ing*
By S e an Hombu g
Recen luc ua ions in eal exchange a es a e equen ly a ibu ed o o e shoo -
ing. In his no e we a gue ha he ele ance o o e shoo ing is ques ionable and ha
he o e shoo ing app oach can a bes accoun o ela i ely mino exchange a e a -
ia ions. This is demons a ed by means o some simple s ylized ac s.
Acco ding o a widely sha ed iew, he ema kable app ecia ion o he
dolla o e he 1980 - 85 pe iod can a leas pa ly be a ibu ed o o e -
shoo ing, a phenomenon i s desc ibed by Do nbusch (1976). A numbe o
impo an issues a e in ima ely connec ed wi h his ques ion:
- Has he up ise o he dolla in he ea ly 1980s been due p ima ily o he
FED's es ic ion o mone a y policy?
- A e lexible exchange a es oge he wi h sluggish commodi y p ices ap
o cause misalloca ions o essou ces?
- And will, consequen ly, a delibe aliza ion o in e na ional capi al ma -
ke s, e e ed o as " h owing sand in he wheels", enhance economic e i-
ciency?
In his no e, we a gue ha he answe s o hese h ee ques ions seem o be
in he nega i e; and ha he heo y o o e shoo ing is i ele an o wha
happened du ing he las yea s. Though i is a ca ching app oach (quickly
adjus ing exchange a es e sus "sluggish" p ices), his model canno add
much o ou unde s anding o he ise and decline o he dolla .
In i s simples e sion, he heo y o o e shoo ing uns as ollows: I home
and o eign bonds a e pe ec subs i u es, he in e es di e en ial mus be
(app oxima ely) equal o he expec ed change in he exchange a e. Thus
(1)
e +
1/e -
1
= i-i*,
whe e e is he exchange a e, i he annual in e es on home and i* he in e -
es on o eign bonds e
+
i is he exchange a e which is expec ed o p e ail
one yea ahead. Now assume ha pu chasing powe pa i y holds s ic ly in
he long un, in es o s ha e pe ec o esigh (o a ional expec a ions),
in e es a es a e equal a he ou se , and ha a one-sho educ ion in he
domes ic money supply akes place. Wi h ou pu gi en by assump ion, ma -
* The au ho wishes o hank an anonymous e e ee o help ul commen s.
ZWS 109 (1989) 3 28*
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444 S e an Hombu g
ke pa icipan s will expec he home cu ency o app ecia e in he long un
because p ices a home will adjus g adually o he educed quan i y o
money. Because e
+
i goes down, e mus also dec ease immedia ely i unco-
e ed in e es pa i y (equa ion (1)) is o hold wi h i and
z*
cons an . Thus he
expec ed app ecia ion o he home cu ency will ake place ins an aneously
because o pe ec o esigh . Bu igh mone a y policy will also inc ease he
domes ic in e es a e acco ding o he s anda d LM-equa ion
(2) M/P = L(Y, i)
and he assump ion ha P and Y do no eac immedia ely. Hence, e mus
dec ease mo e han e
+
i because now an in e es di e en ial has come in o
being. Pu di e en ly, he home cu ency app ecia es a bi mo e in o de o
b ing abou an expec ed dep ecia ion which exac ly coun e balances he
in e es ad an age o domes ic bonds. This second impac is e e ed o as
o e shoo ing because he exchange a e i s app ecia es and hen dep e-
cia es un il i has a ained i s long un (PPP) equilib ium alue. The size o
o e shoo ing is equal o he eme ging change in he in e es di e en ial.
Recall also ha any o e shoo ing gi es ise o changes in he eal exchange
a e. A 3 pe cen educ ion in he domes ic quan i y o money will ul i-
ma ely cause a 3 pe cen educ ion in he p ice le el and an equi alen
app ecia ion o he home cu ency. In he in e media e un, howe e , only
he exchange a e will app ecia e (no ably by mo e han 3 pe cen ) while
p ices will adjus only g adually o hei new equilib ium le els. As a esul ,
we would expec a eal app ecia ion o he home cu ency.
This heo y is co ec bu unimp essi e. Suppose he FED o ake ai ly
es ic i e measu es. By which amoun will Ame ican nominal in e es a es
ise, o he hings being equal? By 3 pe cen ? O 6 pe cen ? E en in he la e
case, which seems o be unpa alleled in con empo a y mone a y his o y1, he
abo e app oach could only explain jus a
6
pe cen o e shoo ing o he dol-
la exchange a e. Gi en he expe ience o he las yea s, his would be a less
exci ing occu ence.
Le us wo k ou ou c i icism by means o some "s ylized ac s". As an
example, we shall conside he de elopmen o he ma k/dolla exchange
a e in he ea ly 1980s. We wan o con as he obse ed a ia ions in he
eal exchange a e wi h hose which could possibly be a ibu ed o o e -
shoo ing in o de o show ha he la e cons i u e bu a iny ac ion o he
o me . In he ollowing able, he eal annual app ecia ion o he dolla
agains he ma k (RAA$DM) and Ame ican and Ge man nominal in e es
a es (3 mon hs) a e epo ed:2
1 To be su e, a change in he in e es a e by 6 poin s is no an uncommon inciden
o e longe pe iods bu has no been obse ed in he Uni ed S a es as he immedia e
consequence o a mone a y es ic ion.
ZWS 109 (1989) 3
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Some No es on O e shoo ing 445
Yea .RAA $ DM ¿DM i$ - ¿DM
1980 + 6.8% 11.6 9.5 + 2.1
1981 + 29.1% 14.0 12.1 + 1.9
1982 + 8.2% 10.6 8.9 + 1.7
1983 + 5.2% 8.7 5.8 + 2.9
1984 + 13.5% 10.1 6.7 + 3.4
1985 + 4.8% 10.1 6.7 + 3.4
The pic u e which eme ges om he able shows clea ly ha he o e -
shoo ing pa adigm canno be conside ed as an impo an explana ion o
wha happened wi h he eal dolla /ma k a e in he 1980s. In 1979, i is
ue, he FED ook es ic i e measu es and he eby pushed up he US in e -
es a e conside ably. Bu , and his poin is equen ly o e looked, he Ge -
man Bundesbank did also! And so did, mo e o less willingly, he o he
Eu opean cen al banks. In he igh column o he able you see ha he
in e es di e en ial du ing 1980-1982 dec eased - a ac which is com-
ple ely inconsis en wi h a dolla 's o e shoo ing in he sense o he abo e
model. Acco ding o he la e , we would ha e expec ed a eal dep ecia ion
o he dolla du ing ha pe iod whe eas, ac ually, a compound app ecia ion
o some 50 pe cen ook place.
Using educed o m es ima es o Do nbusch's model (Swiss anc/dolla
exchange a e du ing 1973 - 1977), D iskill (1981) concludes ha a one-uni
unan icipa ed mone a y inc ease was ollowed by a 2.30-uni s change in he
exchange a e wha amoun s o a 130%-o e shoo ing. We hink ha using
he in e es di e en ial ins ead is a mo e s aigh o wa d and eliable way
o assessing he ele ance o o e shoo ing. This is because in e es a es can
be obse ed di ec ly and hei di e ence is iden ical o he amoun o o e -
shoo ing. Adop ing his app oach, hings look di e en ly: O e he pe iod
1973-1975 he dolla nominally los some 20 pe cen o i s alue in e ms
o he Swiss anc whe eas he in e es di e en ials we e 3.0%, 2.0%, and
2.3 %,
espec i ely.3 Hence a bes a iny ac ion o he exchange a e mo e-
men could be a ibu ed o o e shoo ing.
2 Sou ces: The eal exchange a e is calcula ed om i ems "Ma ke Ra e ( )" and
"Consume P ices (64)" o IMF, In e na ional Financial S a is ics, Washing on, a i-
ous issues. In e es a es a e aken om OECD, Main Economic Indica o s, Pa is,
a ious issues. All da a a e annual a e ages. I should be no ed ha he abo e esul s
emain essen ially unchanged i long- e m in e es a es, nominal exchange a es, o
mon hly da a a e used ins ead.
3 Sou ce: OECD. Exchange a es and in e es a es a e annual a e ages om
mon hly da a.
ZWS 109 (1989) 3
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446 S e an Hombu g
The ollowing conclusions hus eme ge:
Fi s , a ia ions in he dolla /ma k exchange a e canno be a ibu ed o
mone a y e en s because mone a y policy in he Uni ed S a es and Ge many
we e bo h es ic i e and he in e es di e en ial did no change conside -
ably. Fo o e shoo ing o occu , mone a y policies mus adop essen ially
di e en cou ses, and his p econdi ion was no ul illed du ing he ea ly
1980s.
Second and on a mo e undamen al le el, Do nbusch's model can only
accoun o ela i ely mino changes in he exchange a es because he
impac o a mone a y expansion o es ic ion on he domes ic in e es a e
is no mally small. I ha impac amoun s o 3 pe cen , o ins ance, he
exchange a e would o e shoo i s undamen al (PPP) alue by jus 3 pe
cen . This ac is obscu ed in he me ely quali a i e ex book pic u es and
has, o my knowledge, ne e been poin ed ou .
Thi d, i has no ye been es ablished ha he ola ili y o exchange a es
has any hing o do wi h sluggish p ices. I you conside a one-good model
wi hou anspo cos s, o example, i is clea ha he exchange a e can
ne e de ia e om pu chasing powe pa i y e en i capi al ma ke s eac a
million imes as e han commodi y p ices. S icky p ices do no ule ou
commodi y a bi age. The exchange a e p oblem is he e o e essen ially a
p oblem o anspo cos s and/o he mic oeconomic s uc u e.4
And inally, wi h he analy ical g oundwo k o "o e shoo ing" ound
lacking, he e is no heo e ical eason o delibe alize in e na ional capi al
ma ke s. The ad oca es o such measu es ha e no eally shown ha he p e-
sen egime en ails ine iciencies. And because o he g ea p ac ical p ob-
lems o capi al con ols, he bu den o p oo is on hem.
Summa y
Using wo examples we ha e shown ha la ge luc ua ions in eal exchange a es
canno no mally be a ibu ed o "o e shoo ing" in he Do nbusch sense. We p o-
posed o use he in e es di e en ial be ween o coun ies as a di ec and eliable
measu e o he ex end o o e shoo ing. Obse ing ha di e en ial immedia ely e-
eals ha he pas app ecia ion o he dolla agains he ma k has ha dly any hing o
do wi h o e shoo ing.
4 In an in e es ing pape , S ockman (1980) has o e ed some esea ch along hese
lines. He analyzes a ia ions in he eal exchange a e wi hin a amewo k o pe ec ly
lexible commodi y p ices.
ZWS 109 (1989) 3
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Some No es on O e shoo ing 447
Zusammen assung
Anhand zweie Beispiele wu de a gumen ie , daß g öße e Ände ungen des ealen
Wechselku ses kaum einem "o e shoo ing" im Sinne on Do nbusch zugesch ieben
we den können. Es wu de o geschlagen, das Zinsdi e en ial zwischen zwei Lände n
als di ek es und e läßliches Maß ü das o e shoo ing zu e wenden. Du ch Be ach-
ung dieses Zinsdi e en ials wi d so o kla , daß die Dolla au we ung on 1980 - 85
unmöglich au ein o e shoo ing zu ückge üh we den kann.
Re e ences
Do nbusch, R. (1976), Expec a ions and Exchange Ra e Dynamics. Jou nal o Poli ical
Economy 84, 1161 - 1176.
D iskill, R. A. (1981), Exchange-Ra e Dynamics: An Empi ical In es iga ion. Jou nal
o Poli ical Economy 89, 357 - 371.
S ockman, Alan C. (1980), A Theo y o Exchange Ra e De e mina ion. Jou nal o
Poli ical Economy 88, 673 - 698.
ZWS 109 (1989) 3
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