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1. Exchange rates are relative prices of national currencies, and under a floating rate regime they may naturally be viewed as being determined by the interplay of supply and demand in foreign exchange markets. This proposition is uncontroversial, but it provides no more than a starting point for understanding exchange rate determination and its relationship to other macroeconomic variables and to policy. Supply and demand in currency markets are dependent on conditions in other markets, real and financial, which are affected in turn by exchange rates themselves. In fact any analysis which attempted to be general would describe exchange rates as being determined in a complex process of interaction simultaneously with all other variables in the international macro-economy. Such an approach would prove too cumbersome to be helpful empirically. Simplifying assumptions have therefore been used in most standard models to provide explanations which are in varying degrees partial. Each model ...

In recent years the behaviour of the income velocity of money in major OECD economies has displayed considerable volatility for both narrow and broad monetary aggregates (Table 1). Velocity in a number of large OECD economies, for example, fell sharply in 1982. Most notably, declines in the income velocity of M1, M2 and M3 in the United States of 2.3, 4.9 and 5.9 per cent, respectively, were large by historical standards. Such movements in velocity may arise as a consequence of changes in money demand in two important ways:

1. they may result from movements along the money demand function, as the normal implication of changes in its interest rate and inflation expectations arguments; and
2. the money demand function itself may shift (money demand instability), leading to unpredictable changes in velocity.

This paper reassesses, in the light of recent experience, the formulation of monetary policy in terms of targets for monetary aggregates in the major countries. A number of difficulties which have arisen are discussed: instability of the money-income relationship; constraints created by fiscal imbalances; exchange rate variability, as well as debt problems and threats to banks' solvency. The responses of monetary authorities to these difficulties are described and some possible options for the formulation of monetary policy in the future are considered (including nominal income and exchange rate targeting) ...

The Compatible Trade and Production data base (COMTAP) consists of annual statistics on production, imports and exports of manufactured goods. The key feature of this data base is that both the production and trade statistics are classified according to the same nomenclature, namely, the International Standard Industrial Classification (ISIC). The conversion of both trade and production statistics to the ISIC is approximate because there is usually no direct correspondence between the ISIC and the classification in which the trade and production data are reported to the OECD. This report describes the contents of COMTAP , some of the analytic uses to which it can be put, and the problems encountered in setting up the COMTAP data base. Finally, some examples are given of how the data base can be used to calculate "market penetration ratios" for 13 OECD countries over the period 1970 to 1983. The annexes present some of the COMTAP data in summary form ...

The Government Household Transfer data base (GHT) consists of annual statistics on social security and welfare transfers to households from government, covering the period 1960-84. Social security benefits are classified by subfunction according to the Classification of the Functions of Government (COFOG). This report describes the contents of GHT, the sources used and the problems encountered in setting up the data base. Tables are presented showing levels expressed in U.S. dollars per head of population, transfers as a percent of GDP, the distribution by subfunction and elasticities of transfers with respect to GDP. Growth rates are given for the periods 1960-73, 1973-79, 1979-84 and 1960-84. The annexes contain country tables showing the subfunctional breakdown of transfers in national currencies and a description of the items included and the sources used ...

This paper provides an analysis of the recent evolution of the U.S. current account external deficit in the context of the OECD Secretariat world model, INTERLINK. It seeks to assess to what extent developments in the U.S. current balance since 1980 might be viewed as being surprising, at least by the standards of the relationships embodied in the current U.S. trade block of that model ...

This paper examines the question of tax reform in OECD countries. First, the reasons for tax reform are reviewed. These include economic efficiency arguments as well as concerns about equity which are often a major consideration. Next, the paper considers the many factors which constrain governments in their effort to reform the tax system (such as inherent conflicts between efficiency and equity, and the non-revenue objectives of taxation), and how those constraints might be reduced. Finally, the paper reviews the extent of tax reform in OECD countries, noting some of the remaining problems ...

This paper discusses several aspects of the medium-term orientation of OECD countries' economic policies in the 1980s, concentrating on monetary and fiscal instruments. The developments that led to the adoption of such a "medium-term strategy", and the apparent analytical rationale for it, are first described. The paper then examines the way the strategy was actually implemented, attempting to judge how closely policies have in fact followed medium-term objectives, and assesses the results. Some lessons from experience with the strategy are outlined in conclusion ...

The purpose of this study is to assess the current state of understanding about the effects of monetary policy, both at the conceptual level and in the light of the experience of the seven major OECD countries (the United States, Japan, Germany, France, the United Kingdom, Italy and Canada) and three selected smaller open economies (Australia, the Netherlands and Sweden) since the early 1970s (1). Over this period, there have been substantial developments in the policy making environment and in the conduct and implementation of monetary policy which may have significantly affected the way monetary variables influence the real sector of the economy.

A. Changes in the macroeconomic and financial environment and their implications for policy making

Since the early 1970s there has been a general deterioration in the macroeconomic situation in OECD countries. These have been subjected to large supply shocks, to substantial changes in the rate of inflation, to slow economic growth, to ...

Agricultural support costs OECD countries billions of dollars per year in lost income. It is frequently argued, however, that this is not waste, but is rather a fair price to pay for a number of "non-economic" objectives such as thriving rural communities and increased national security. This paper analyses these objectives and their relationship with agricultural policy. It draws three conclusions: first, the so-called non-economic objectives (SNOs) are, in fact, economic; second, being economic they are amenable to quantification and economic analysis; and, third, present forms of agricultural support may be inefficient means to achieve these objectives ...

Although considerable effort has been expended on constructing measures of total factor productivity, there has been little subsequent effort at verifying that the constructed data have the expected properties. This paper proposes a number of tests to determine whether total factor productivity is measured correctly. A similar approach can be used for other economic data ...

The Compatible Trade and Production data base (COMTAP) consists of annual statistics on production, imports and exports of manufactured goods. The key feature of this data base is that both the production and trade statistics are classified according to the same nomenclature, namely, the International Standard Industrial Classification (ISIC). The conversion of both trade and production statistics to the ISIC is approximate because there is usually no direct correspondence between the ISIC and the classification in which the trade and production data are reported to the OECD. This report describes the contents of COMTAP, some of the analytic uses to which it can be put, and the problems encountered in setting up the COMTAP data base. Finally, some examples are given of how the data base can be used to calculate "market penetration" and "export performance" ratios for 23 OECD countries over the period 1970 to 1985 ...

Demographic changes, such as those anticipated in most OECD countries, have many economic effects that impinge on a country's fiscal viability. Evaluation of the effects of associated changes in capital-labour ratios and the welfare and behaviour of different generations requires the use of a dynamic general equilibrium model. This paper uses an overlapping generations demographic simulation model, which incorporates bequest behaviour, technological change, the possibility that the economy is open to international trade, and government consumption expenditures that depend on the age composition of the population. The model has been further adapted to study the effects of anticipated demographic changes in Japan, the Federal Republic of Germany, Sweden and the United States. The simulation results indicate that these changes could have a major impact on rates of national saving, real wage rate and current accounts. One of this paper's fundamental lessons is that allowing for general ...

An increase in long-term economic growth requires higher investment in the OECD economies if it is to be achieved, otherwise faster growth will generate unsustainable pressure on resources. Higher investment can only occur if there is higher saving which could perhaps be generated by an increase in public sector saving. This paper looks at the consequences for five major economies of the OECD of a continued reduction in government deficits, or increase in surpluses, using the OECD econometric model. The conclusion of the paper is that using conventional economic relationships, a fall in government expenditure should increase national savings and lead to higher private sector investment. Over the longer term, the higher investment will raise the actual and potential output level of the economy -- more than compensating for the lower short-term level of output associated with the cuts in government expenditure ...

This document sets out a new method for assessing the implications of public expenditure cuts for income distribution. The instrument is a social accounting matrix providing the appropriate conceptual framework for estimating all the direct and indirect effects of changes in any given category of public expenditure (e.g. agricultural investment or education spending). By using this matrix it is possible to calculate the upstream effects of an adjustment measure on income distribution. It shows, for instance, that a decline in agricultural investment reduces employment and wages in the building sector. Similarly, a fall in education spending depresses the incomes of the skilled dependent labour force. The downstream effects have also been estimated: in the case of education this means cutbacks in free services to families and so a fall in their incomes.

This method has been applied to Indonesia in 1984-88 by comparing the observed effects of lower public spending due to structural ...

This paper examines the role of structural indicators in the process of multilateral surveillance of structural policies. An analytical framework is suggested that is based on welfare economics and which focuses on efficiency considerations. Potential indicators are examined for six areas -- taxation, trade, industry, agriculture, labour markets and financial markets. These case studies allow a series of lessons to be drawn concerning the use of structural indicators ...

This paper surveys Japanese saving behaviour, whose rate is one of the highest among OECD countries. Macroeconomic factors such as rates of economic growth and inflation may have been important in explaining the high saving rate in the past and the more recent downward trend. Even though growth is now rather lower than in the past, there remain important structural factors which explain the high rate of saving. The most important of these relates to demographic factors. Government policies and cultural and institutional factors seem to have played a relatively less important role. In the coming years, rapid ageing of the population is likely to have an important effect on the rate of saving. The Japanese saving rate is expected to show a substantial decline beyond the year 2000 according to life-cycle model simulations. The implications of this for domestic investment and international saving/investment balances may be important ...

The variety of channels through which devaluation of the exchange rate impacts on real tax receipts, calls for empirical clarification. This paper should be seen as a first attempt towards empirical evidence. It establishes the causal relationships between the real exchange rate and real tax receipts. A causality test rejects the hypothesis of unidirectional causality running from taxes to the exchange rate. The causal inferences from the Sims test allow to use the real exchange rate as an exogenous determinant in a simple simultaneous equation model. The model endogenises tax yields and tax bases to allow for a test of the significance and relevance of the exchange rate to explain variations in real tax receipts. An important insight results from the distinction of the direct (price) effect and indirect (output) effect of changes in the real exchange rate on tax receipts. A double-logarithmic version of the model with (seasonally adjusted) quarterly data is estimated for Korea and ...

This paper measures the net dollar position of the non-U.S. private sector and a few other international positions -- notably the net foreign-currency position of the U.S. private sector. These currency positions provide the basis for a discussion of portfolio effects which are especially relevant for questions related to the future financing of U.S. current-account deficits. A special feature of this exercise is the explicit identification of the non-U.S. public sector as a potential source of dollar assets for the non-U.S. private sector ...