Pros and cons of official dollarization in Eastern Europe

The balance of payments barrier is the biggest obstacle to growth in Eastern Europe. This problem stems from the existence of individual national currencies which dynamically increases the risk associated with capital inflows. Capital inflow leads to both domestic growth and domestic currency real appreciation, reducing net exports to a level insufficient to service international debt obligations stemming from capital inflow. To avoid losses when capital flows are reversed, high domestic interest rates are required to stem capital outflow. Result is the decline of domestic economic activity. Adoption of foreign currency eliminates the need for net exports as the source of revenue needed to service debt obligation, hence it renders the balance of payments as an obstacle to sustained capital flows and economic growth irrelevant.     

EXCHANGE RATE PROBLEMS IN NATIONAL ACCOUNTING OF DEVELOPING COUNTRIES*

Developing countries which typically have import surpluses and inflationary pressures because of insufficient savings are prone to use indirect taxes on imports (Tm) and subsidization of exports (Sx) in order to prevent deterioration of the balance of trade. If these substitutes for devaluation are included in the net indirect tax component of product at current market prices (Ym) the import surplus is likely to be understated, and Ym upward biased. This distortion will be avoided if imports and exports are measured at effective exchange rates (ER), that is, at official rates (OR) plus Tm and Sx respectively, and if (Tm - Sx) is deducted from the net indirect tax component of Ym. Only in this manner become imports and exports consistent with the other uses and resources at market prices and can be articulated with them. At base-year prices the volume index of product at OR diverges from that of ER to the degree that the composition of imports and exports in regard to tax and subsidy rates computed ad valorem significantly changes. Such a case is similar to that of the price indexes of imports and exports moving in diverging proportions: the trade balance at base-year prices will differ from that at current prices. The resulting discrepancies in national accounts have led to proposals of deflating, for example, exports by the price index of imports. Suchlike approaches are incompatible with the principle of national accounting that prices are supposed already to measure substitution values. Deflating exports by import prices means reintroducing substitution values, as does, for example, deflation of incomes by a consumer price index. Correspondingly, since the trade balance at ER conceptually expresses the value of imports at domestic market prices as compared to the corresponding domestic market value of exports, and if at ER the trade balance diverges from that at OR, the former balance has an important meaning (as has the trade balance at base-year prices as compared to that at current prices) and the resulting discrepancy between the two measures should not be removed merely for the sake of accounting smoothness. In contrast to the market price approach, the measurement of product at base-year factor cost is indifferent to the measurement of the trade balance at ER and at OR. It is, therefore, proposed in countries in which part of import taxation and export subsidization substitutes for devaluation, to record imports and exports in the national accounts at effective exchange rates, and to correct the net indirect tax component of product correspondingly. Imports and exports at official exchange rates should be shown within the balance of payments, and the latter separately as a memorandum item.     

Reducing large net foreign liabilities

In light of persistently large net foreign liability (NFL) positions in several euro area countries, we analyze 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylized facts on the channels through which NFLs were reduced and estimate factors that make episodes “stable”, that is, sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e., current account surpluses), in particular in advanced economies. Considering the different components of a country's external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus that consists of a combination of relatively high exports, low imports and low net factor income payments. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programs and sovereign debt restructurings also contribute to longer term stability.     

International trade and macroeconomic dynamics: The case of U.S. bilateral trade with G-7 countries

The short- and long-run effects of exchange rates, income, interest rates and government spending on U.S. bilateral trade with the other G-7 countries are investigated using an autoregressive distributed lag (ARDL) model. The primary contribution of this study is to consider separating the analysis of exports and imports in an integrated model that empirically encompasses four major schools of thoughts – elasticity, Keynesian income, absorption and monetary approaches – in order to identify macroeconomic linkages to U.S. bilateral trade with the other G-7 countries accurately. Results suggest that, in both the short- and long-run, U.S. imports and exports are highly sensitive to changes in U.S. and foreign income, while U.S. imports and exports are relatively insensitive to changes in bilateral exchange rate. It is also found that both exports and imports are more responsive to changes in government spending than changes in interest rates in both the short- and long-run.     

The J‐Curve: Evidence from Fiji*

This article provides new evidence on both long run and short‐run determinants of trade balance for Fiji and investigates evidence of J‐curve adjustment behaviour in the aftermath of a devaluation. We adopt a partial reduced form model that models the real trade balance directly as a function of the real exchange rate and real domestic and foreign incomes. Cointegration analysis is based on a recently developed autoregressive distributed lag approach—shown to provide robust results in finite samples. The long run elasticities are also estimated using a dynamic ordinary least squares approach and the Fully Modified Ordinary Least Squares (FM‐OLS) approach. Amongst our key results we find that there is a long‐run relationship between trade balance and its determinants. There is evidence of the J‐curve pattern; growth in domestic income affects Fiji’s trade balance adversely while foreign income improves it.     

How Elastic is East Asian Demand for Consumption Goods?

This paper investigates import demand in East Asia. Estimating exchange rate elasticities for countries in the region is difficult because many imports are used to produce goods for re‐export. An exchange rate appreciation that reduces East Asian exports will also reduce the demand for imported inputs that are used to produce exports. To correct for this bias this paper examines consumption imports, since these goods are intended primarily for the domestic market. Results from several specifications indicate that currency appreciations and increases in income in East Asian countries would significantly increase imports into the region.     

Optimising and Non‐optimising Balance of Trade Models: A Comparative Evidence from India

This study estimates and compares the competing optimising and non‐optimising balance of trade models using Indian data. The results obtained from the optimising model suggest that the prices relative to user cost of capital and the real wealth lead to a deterioration, while the real capital stock results in an improvement in trade balance. The estimates of conventional non‐optimising balance of trade model show the significant effect of domestic income and real exchange rate and the insignificant effect of world income on the balance of trade. The error correction models reinforce the long run estimates and show the significant effect of lagged equilibria on the balance of trade. The non‐nested hypothesis tests provide mixed evidence for the preference of one model over the other. The J test suggests that the optimising model outperforms the non‐optimising model, while the F test shows that both these models are acceptable in explaining the balance of trade.     

The Malaysian Real Trade Balance and the Real Exchange Rate

The cointegration technique is used to examine the long‐run and short‐run relationships between the real Malaysian trade balance with the real exchange rate, domestic and world incomes. The results suggest that a real ringgit exchange rate depreciation improves the trade balance in the long run. World and domestic incomes are also found to be important determinants of trade balance. The significance of world income on trade balance indicates that Malaysia is prone to external shocks. An error‐correction model is then estimated to study the short‐run dynamics of the effects of exchange rate. The impulse response analysis shows that the effect of exchange rate on the trade balance lasts for about three years. A devaluation of ringgit will initially improve the trade balance, albeit small, after which the trade balance starts to deteriorate, and then improves again suggesting that there exists a delayed J‐curve.     

我国经济结构调整对国际收支差额的影响——基于消费、投资与外贸结构的分析

笔者利用SVAR与VEC模型研究发现,通过投资、消费、外贸结构调整对我国国际收支进行调节,在短期与长期存在差异性。短期结构调整的重点应放在提高城镇居民消费占比,适当扩大政府消费占比,有效抑制进出口增长速度等方面;长期调整的重点应集中于有效提高城镇与农村居民的消费占比上。由于我国消费和外贸结构调整对国际收支调节的作用突出,因此,需要通过显著提高居民收入水平,不断增强国内消费需求来改变消费、投资和外贸结构,以促进我国国际收支基本平衡的实现。     

Die mittelfristigen Folgen der Wechselkurspolitik für Leistungsbilanz und Inflationsrate

Summary Nowadays it is uncontested that price elasticities of demand for exports and imports are high enough to secure an improvement of the current account of the balance of payments in the case of an exchange rate devaluation. Indeed it may take some time until the effects materialize and the primary effect may even run in the opposite direction. However, doubts arise about the favourable reaction of the current account if secondary price and wage effects are taken into consideration—what has been done more thoroughly in recent times.The present study deals with the medium term aspects of exchange rate changes in Austria. In order to quantify exchange rate effects on foreign trade and prices double weighted exchange rate indices and double weighted foreign trade price indices were computed and a simple econometric model was built. Behavioural equations for quantities and prices of exports and imports (as far as possible, disaggregated for raw materials, energy and manufactures), for domestic prices and wages were estimated. In addition to this model exchange rate effects on tourism were considered separately. In order to evaluate the consequences of the revaluation of the Austrian Schilling simulations were run under the assumption that in the period 1972 till 1976 Austria had kept constant the average exchange rate of the currencies of its main trading partners (competitors). The main results are as follows: If Austria had pursued a constant exchange rate policy in terms of the export weighted exchange rate index during the years 1972 to 1976 instead of actually revaluating the Schilling by 19 percent the volume of exports would have been higher by 1 billion Schilling (at 1970 prices) whereas the volume of imports would have been lower by 16 billions Schilling; measured in current prices exports and imports would have been higher by 59 billions and 60 billions, respectively, and the receipts from tourism would have grown faster by 12 billions. Therefore, the trade balance would have deteriorated by 1 billion and the current account would have improved by 11 billions. By 1976 consumer prices and wages would have reached a higher level (+7 3/4 percent and +5 1/4 percent, respectively). The results of this study are not in contradiction to those obtained in comparable work for other countries.There is some indication pointing to a further deterioration of the current account in the longer run: The revaluation caused profit squeeze which hits exporters as well as import competing domestic producers may weaken investment and the ability to maintain market shares. The revaluation could favour the sheltered sector of the economy in comparison to the exposed sector and shift the structure of the economy to the disadvantage of the current account.     

Macroeconomic stability and the optimal degree of capital mobility

This paper examines the relationship between capital mobility and the short-term stability of employment and of prices. It looks at the optimal degree of capital mobility to stabilize income. The sources of instability considered are fluctuations of domestic expenditure or absorption, net exports and international interest rate. In this latter case, loans at fixed nominal interest rates and floating rates are analyzed. Fixed and flexible exchange rate regimes are studied.     

人民币汇率、资产价格与短期国际资本流动

本文基于1999年1月～2008年6月的月度数据,运用ARDL-ECM模型检验了人民币汇率、资产价格与我国短期国际资本流动的关系。结果表明,长期内,人民币汇率预期变化率和国内外利差是影响短期国际资本流动的显著因素,人民币汇率水平、国内股市收益率和房地产收益率并未对短期国际资本流动产生显著影响;短期内,人民币汇率、国内外利差和房地产收益率对短期国际资本流动有显著的滞后效应。     

The Bank of England and Parliament were monetarily adroit during the Napoleonic Wars

Abstract

With the connivance of Parliament, was the Bank of England's over issue of banknotes inflationary? The inflation stemmed from military subsidy and Peninsula campaign payments, as well as food imports, far in excess of Britain's export earnings to cover these capital transfers (particularly when crimped by the Continental Blockade), and not merely from domestic credit over issue. Neither domestic money creation nor the fiscal theory of the price level best explains the imbalance in Britain's international accounts during the Napoleonic Wars. This deficit stemmed from domestic production shortfalls in essentials (above all food production) and contractual obligations such as military spending/subsidies relative to the pound's international purchasing power which emanated from the ability of Britain to sell exports and replace imports with domestic output (raise food production internally). These types of highly inelastic transactions tended to operate independently of domestic money creation, fiscal policy (taxes) or price developments (inflation). This article tracks England's bullion debate, which concerned whether gold prices rose (and hence sterling's exchange rate fell) because military capital transfers overwhelmed the balance of payments, or because the Bank of England over issued paper money after the gold cover was removed in 1797. The issues herein are not antiquated because the primary issues in monetary debates for two centuries have concerned the cause of inflation and deflation, and whether the domestic money supply or the balance of payments is responsible. Determining actual causation is critical for the proper solution: monetary deflation, or domestic and international restructuring of trade and investment.     

SHORT-CUT ESTIMATES OF REAL INCOME

The United Nations International Comparisons Project (ICP) has conducted in-depth purchasing-power parity (PPP) studies of the so-called "benchmark" countries (of which there were 34 in the 1975 sample). In the absence of PPP studies of the rest of the countries in the world, the ICP team has constructed "short-cut" estimates of real income (that is, income converted from domestic currency to dollars at PPP) for the nonbenchmark countries. The idea of a "short-cut" procedure for estimating real income is to run a regression of real income on nominal income (that is, income converted from domestic currency to dollars at a market exchange rate) and other variables among the benchmark countries and then to use this regression to estimate real income for the nonbenchmark countries. The most recent ICP short-cut estimates have been based on regressions of real income on nominal income and the foreign trade ratio. The present study expands the list of candidate variables that might be included in a short-cut regression. The list includes educational attainments, the share of minerals in GDP, the trade balance, the growth of the money supply, tourist receipts, and the share of nontradables in GDP. The theory underlying the inclusion of each of these variables is discussed. Regressions are run with various combinations of these variables and some short-cut estimates of real income for 76 market economies are presented.     

Foreign exchange reserves and import demand in a developing economy: the case of Pakistan

Conventional specifications of import demand in LDCs have commonly been plagued by implausible and unstable parameter estimates. This paper shows the importance of imposing long‐run income homogeneity and of including foreign exchange reserves when estimating import demand function for an LDC. Using several cointegration techniques, it is shown that there is one linear relationship among real imports, real income, relative import prices and real foreign exchange reserves. In addition, by employing stability tests for cointegrated systems by Hansen (1992a), the paper shows that only when foreign exchange reserves and long‐run unit‐income homogeneity are accounted for does a constant parameter, long‐run equilibrium relation emerge for Pakistan. Also, the ensuing short‐run dynamic model is constant and data‐coherent. Finally, the study provides information on the speed of adjustment to equilibrium and the median and mean time lags of adjustments of real imports to changes in their determinants. The results indicate a quick response of real imports to changes in their determinants.     

The impacts of China on economic growth: Evidence for Brazil,Chile, and Peru

This study empirically analyzes the direct impacts derived from the swift increase in exports to China (referred to as “the impact of China”) on the economic growth of three selected South American countries, Brazil, Chile, and Peru, during the commodity boom between 2001 and 2008. The results stemming from the balance-of-payments-constrained growth model suggest that the magnitude of China’s impact was less than 1 percent, although it ranged from the largest to the second largest impact among all trading partners for the three countries. The estimated balance-of-payments growth rate of domestic income is lower than the real growth rate of domestic income. This is because the growth rates of the export volumes were not sufficient even during the commodity boom, on account of the continued increasing trends of income elasticity of demand for imports. Furthermore, the income elasticities of demand for imports from China were especially high. Therefore, the three countries will continue to face further increase in the income elasticity of demand for imports as well as a stagnant growth rate of export volumes. Thus, the balance-of-payments position will continue to be the main growth constraint for these countries.     

Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects

This paper develops a three‐currency model to study the determinants of the demand for assets and liabilites denominated in an international currency and to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be attractive to investors from high‐income economies and fund‐raisers from emerging market economies.     

THE IMPACT OF FOREIGN CAPITAL ON MACROECONOMIC PERFORMANCE IN CENTRAL ASIA

This paper investigates the short‐run impact of shocks in international capital flows channeled through foreign direct investment (FDI) and foreign aid on national output and export performance in five Central Asian economies under a dynamic multivariate structural vector autoregressive (SVAR) framework. The identification of structural shocks is implemented by AB model based on IS‐LM‐BP postulates. The main message is that external capital shocks are persistent and small open economies are weak to absorb them. Overall, the aid shocks reduce national outputs, while FDI increase it, on average. The expansion of global demand (G20) leads to an increase in domestic GDPs, notably in Kazakhstan, Kyrgyzstan and Uzbekistan. The impact is augmented by a positive effect of FDI on export channel (and net exports) that shift the IS curve upwards. We cannot find any significant aid‐FDI nexus in the region, except in Kazakhstan. The structural variance decomposition (SFEVD) results suggest that external flows and foreign demand together explain the bigger part of variability in domestic GDP and exports. Finally, variations in foreign capital, aid and FDI, are mainly explained by series themselves. The role of domestic activities is found to be weaker for aid and greater for FDI. The results could be attributed to rigid exchange rates, high trade dependence, and necessity for foreign capital to explore natural resources in Central Asian region. Our results provide some valuable suggestions to improve an investment climate for boosting economic growth.     

Does devaluation improve the current account?

This paper incorporates the link between devaluation, foreign interest payments, and the current account into a fairly general macroeconomic model in which exchange rate changes influence aggregate demand through exports, imports, and expenditure as well as aggregate supply via the cost of imported factors of production. On the basis of available statistical estimates of the behavioral and structural parameters of the model, an attempt is made to assess the empirical importance of this link, among others, in a group of highly indebted industrial and developing countries. By and large, the empirical results indicate that high foreign debt and interest payments tend to reduce the short- to medium-run effect of devaluation on national income, especially in the LDCs, but make little difference to its generally positive effect on the current account.