The Morishima elasticity of substitution for the multi-output profit function, currency substitution and exchange rate determination in the United States

This dissertation consists of three essays in international economics.; In the first essay, I derive expressions for the Morishima elasticity of substitution for a multi-output and multi-input profit function and show an empirical implementation with an application to the effects of imports on the employment in the U.S. (from 1974 to 1993). I use the GNP approach and a two-output and two-input translog profit function to model demand and supply functions. Our results indicate that it is appropriate to specify our model with multiple outputs. The empirical results also reveal that imports are consistently a substitute for the labor input and are an important factor which has caused the labor demand to slow since the early 1980s.; In the second essay, by using the symmetric normalized quadratic variable profit function, I estimate the elasticities of substitution of U.S. holdings of monies denominated in U.S. dollars, Canadian dollars, British pounds, Japanese yen and German marks for the U.S. over the period 1979:04 to 1993:04 and analyze the effects of changes in interest rates on relative demand for different currencies. I observe a surprising behavior change in the holdings of foreign currencies during 1985-86 period. The degree of currency substitution between U.S. currency and foreign currencies decreases dramatically over time. This study also reveals that the currency substitution between U.S. and foreign currencies is more sensitive to a change in the U.S. interest rates than to a change in foreign interest rates. The diminishing Morishima elasticities of currency substitution in the U.S. suggest that international currency substitution is not an important factor in undermining the stable demand for U.S. money M1.; In the third essay, I extend the monetary exchange rate model to allow for the currency substitution between two countries. The exchange rates from 1978:Q4 to 1991:Q2 between the U.S. dollar and Canadian dollar, U.S. dollar and Japanese yen, U.S. dollar and U.K. pound, and U.S. dollar and German mark are used. Cointegration analysis results show that our new model is a valid long-run exchange rate determination model for the US-German, US-Japanese and US-UK exchange rates and currency substitution factors are significant for all these models. Finally, based on the root mean square error of the forecast, for 1- to 10-quarter horizons, the US-Canada, US-Germany, US-Japan and US-UK extended models in general outperform the random walk model.