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Article: Long Run PPP may not hold after all The research paper aims to correct recent

theories that the Purchasing Power parity may hold in the long run, by showing that these theories have reached wrong conclusions. The article explains the results of tests by the researcher to point out lack of consistency in the PPP in the very long run (i.e 100 years). The method used is to show the presence of size biases in PPP, using data on Nominal exchange rates and Price levels. Initially, the paper examines relative price movements as a determinant of equilibrium exchange rate changes. Testing for real exchange rate as a function of relative price of foreign goods, the author confirms the initial hypothesis of a positive relation between both variables. One of the main issues addressed whether or not there is large bias in the presence of unit root for the PPP. The paper is divided into five sections. The first section deals with the Econometric issues concerning the reasoning behind the large biases in the unit root and co integration methods. It attempts to test and verify the size bias in the unit root tests previously asserted in other researches. After the analysis of a combination of tests such as the, time series and autocorrelation analysis, the author concludes that there is a significant Size Bias using Philips-Perron (1989) test. In the second part of the paper, the exchange rate is decomposed into various components using a 25 year period data from United States and UK, and the parameters of the model. Previous data generally mentions two major data categories as being traded and non traded goods. The sub index for the deflator for personal consumption of commodities is used as a Price Index for traded goods, and the deflator for personal consumption of services is used as a price index for non traded goods. A series of test in Unit root and co integration are then run on the sample. The 3rd portion of the paper is the construction of a 100 year time series based upon the model developed in the disintegration of exchange rates in portion 2. The monte-carlo experiment is run to measure the true size of the various tests for the long run PPP. Finally the paper concludes that there is infact a large sample bias in the tests for a long run PPP. This could be due to a root component causing biasness , manifested in the econometric model as the relative price of non-traded goods in the real exchange rate. Hence omitting an important variable causes biasness in the size measurement of PPP.

Article Summary: Thailand Financial crisis and monetary policy The article expresses the Thai crisis of 1997 as a function of failed monetary policy, consisting of fixed exchange rates and high interest rates. The article also questions whether the inflation targeting now being considered will serve the purpose. Finally, appropriate new measures are suggested. The fixed exchange rate had persisted for too long now. The analysis of monetary policy in the 1990s reveals the problems inherent within the policy structure. Capital inflows have been a major problem in various ways. The resulting rise in domestic inflation from huge capital inflows results in appreciation of real exchange rate, undermining export competitiveness. Secondly, these inflows, were sensitive to fluctuations in international interest rate, hence unexpected shocks could render many harms. Thirdly, persistent capital inflows make the banks generally careless about the handling of loans because of

increased optimism. Hence average quality of Banks declines. Hence policies should be aimed at neutralizing the expansionary effects of capital inflows. With regards to the government fiscal policy, the discrepancies between spending and revenue were wide enough to the extent of a persistent deficit, until greater controls, better economic activity and structural adjustment programs were put in place. Fiscal surplus in these times remained between 5-3%. With regards to the monetary policy, and growth resulted from stable exchange rates and high interest rates, whereas financial liberalization resulted in a shift from direct controls over monetary aggregates to more indirect ones, and a reduction in the central bank power over monetary variables. Now, greater financial openness and increased access to foreign markets results in decrease dependency on the central bank, seen in greater borrowing from abroad by local financial institutions, during the 1986-90 era. Hence the Fed conducted open market operations (initially through government bonds and later through issuing its own bonds) in order to reduce Market Liquidity, along with forcing a slowdown in credit growth. Finally, with the ever increasing capital inflows, in 1994, the Fed put limits on net foreign exchange exposure of financial institutions. These policies were successful in containing inflation to a minimum of 5.1%, however, in this time period the inflation meant that the real exchange rate had appreciated. The article argues that appreciation of real exchange rate as a means of containing excess demand is at the cost of increasing imports. Hence export halt has an inhibiting effect on the growth rate, which became the case of Thailand, in the resulting stagnation. The resulting crisis broke out in July 1997 is attributed to following causes: irresponsibility of Private corporations in continuous investment, excessive lending during periods of huge capital inflows and instability of international financial markets. In response to the crisis, the Fed further tightened Monetary policy, further increasing the interest rates. As an aftermath of the crisis, more and more of bank loans turned into Non Performing Loans (NPLs). Finally, the consequences of the crisis were clear in that the abolishment of fixed exchange rate regime was followed by three alternative monetary policy regime proposals, namely discretionary monetary policy with multiple targets, Monetary targeting as practiced in the past, and Inflation targeting. In curbing inflation, short term interest rate targeting is mentioned in the article. These open market purchases affect through a mechanism of liquidity on domestic financial market in turn affecting the repurchase rate leading to changes in the interbank rate, and finally affecting the deposit and lending rates. Finally, Inflation targeting as a measure is subject to skepticism: it is difficult to implement, and in case of implementation, the costs to the economy are very high. Perhaps the most important lesson is that monetary policy should not focus solely on one variable at a time only, such as inflation or exchange stability, but that flexibility is required in times of rapid change and in continuous presence of large external shocks.