Invoicing currency and the optimal basket peg for East Asia: Analysis using a new open economy macroeconomic model

An important characteristic of trade in Asia is that the US dollar is the dominant invoicing currency. This fact might have a consequence on the region's choice of the currency regime. To investigate this possibility, I develop a three country “new open economy macroeconomics” model that consists of East Asia, Japan, and the US. Assuming that East Asia pegs its currency to a basket of the other two's currencies, the optimal basket weights are derived numerically. It is shown that the weights under a realistic invoicing pattern are drastically different from those in the textbook case of “producer currency pricing.” J. Japanese Int. Economies 20 (4) (2006) 569–589.     

Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence

In this article we study the importance of the quality of fiscal adjustments and macroeconomic conditions for the persistence of budgetary consolidations. In contrast to previous work in this area, we do not arbitrarily predefine a measure of persistence to evaluate consolidation “success.” By employing duration analysis techniques, the length of a consolidation spell is rather determined endogenously. Our results based on a sample of industrialised OECD countries show that “consolidation fatigue” and the quality of fiscal consolidations are indeed important determinants of their longevity. Moreover, high debt–GDP ratio and fiscal tightening in other OECD countries raise the likelihood of consolidations to persist. Applying our results to European countries in the 1990s provides only weak evidence suggesting that the Maastricht process contributed much to the fiscal consolidations observed in Europe during the 1990s. J. Japan. Int. Econ., December 2002, 16(4), pp. 512–535. ZEI, University of Bonn, Bonn, Germany, Indiana University, Bloomington, Indiana; and CEPR; Strathclyde University, Glasgow, Scotland; and CEPR; and ECB, Kaiserstrasse 29, D-60311 Frankfurt a.M., Germany; and ZEI. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E61, E62, E65.     

The Euro and International Equity Flows

We use a new panel data set on bilateral gross cross-border equity flows between 14 countries. We fit a “gravity model” to these data and a strictly comparable set of data for manufactures trade between these countries. The results are strikingly similar, although the coefficient on the distance variable is lower for equity than for trade flows (but still highly significant). We use the results to throw some light on the likely consequences of unifying the European equity markets.J. Japan. Int. Econ.December 1998,12(4), pp. 406–423. London Business School and CEPR, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom and London School of Economics, London WC2 2AE, United Kingdom.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F21, F3.     

Optimal currency shares in international reserves: The impact of the euro and the prospects for the dollar

Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance–covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank's desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency (“punching above its weight”). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. J. Japanese Int. Economies 20 (4) (2006) 508–547.     

Life cycle and bequest savings A study of Japanese and U.S. households based on data from the 1984 NSFIE and the 1983 survey of consumer finances

This paper investigates whether the elderly save or dissave in light of two newly available sets of cross-section micro data, the 1983 “Survey of Consumer Finance” for the United States and the 1984 “National Survey of Family Income and Expenditure” for Japan. Contrary to dominant earlier findings we find for the United States that families after retirement dissave on average about a third of their peak wealth by the time of death, leaving the rest (mostly their homes) as bequests. For Japan, special handling is made to eliminate possible sample selection bias due to the different economic characteristics of the elderly forming independent households and those living with children. We find that the elderly belonging to both groups continue to save, and moreover, there appear to be significant signs of ongoing wealth transfer between the generations. The data in both countries also show that the elasticity of saving with respect to a life time income measure is significantly greater than unity, and more strongly so within higher age groups. J. Japan. Int. Econ., December 1988, 2(4), pp. 450–491. Department of Economics, University of Pennsylvania, Philadelphia, PA 19104-6297, and National Bureau of Economic Research.     

Do all networks facilitate international commerce? US law firms and the international market for corporate control

This paper estimates the effects of several American law firms' international networks of offices on the total value of overseas mergers and acquisitions (M&A) by US corporations. Nowadays many nations can review proposed mergers and US law firms help clients overcome such regulatory hurdles, effectively greasing the market for corporate control. However, they can also oppose transactions that are inimical to their clients' interests. I present evidence that suggests that Baker & McKenzie—the US law firm with the most overseas offices—has facilitated such transactions, whereas the combined effect of the next five largest American law firms has tended to reduce such M&A. J. Japanese Int. Economies 17 (4) (2003) 520–537.     

Country size and business cycle volatility: Scale really matters

In a recent study Andrew Rose found that country size does not matter for several economic outcomes [Rose, A.K., 2006. Size really doesn't matter: In search of a national scale effect. J. Japanese Int. Economies 4, 482–507]. However, he did not consider the effect that country size may have on business-cycle volatility. To investigate the empirical relationship between business cycle volatility and country size, we use a panel data set that includes 167 countries from 1960 to 2000. The results suggest very strongly that the relationship between country size and business cycle volatility is negative and statistically significant. This implies that smaller countries are subject to more volatile business cycles than larger countries. This holds both in a simple bivariate model and when we include Rose's control variables and openness. Moreover, the results are robust to different sample periods and several detrending methods. It follows that country size really matters, at least in terms of cyclical fluctuations. J. Japanese Int. Economies 21 (4) (2007) 424–434.     

Connecting two views on financial globalization: Can we make further progress?

To understand why developing countries do not automatically benefit from financial globalization, both the need for a minimum institutional quality (the threshold hypothesis) and the possibility of varying volatility of different types of capital flows (the composition hypothesis) have been suggested. This paper contends that the two hypotheses are intimately linked, and provides supportive empirical evidence. J. Japanese Int. Economies 20 (4) (2006) 459–481.     

An Ecological Footprint Approach to External Debt Relief

This paper applies Martinez-Alier’s [Environ. Values 2 (1993) 97] “ecological debt” concept to the problem of debt relief, exploring the possibility of compensatory transfers from rich to poor countries based on existing ecological balances. I employ recent estimates on ecological footprints and ecosystem values to estimate the ecological debt to be distributed among eligible transfer recipients––all less-developed countries (LDCs). The results provide a policy criterion for transfers in the event that future circumstances make large-scale international debt relief compulsory. The study probably underestimates the appropriate transfer amounts because of conservative assumptions regarding the environmental values and the size of the north’s ecological debt in physical terms.     

Intraday seasonality in activities of the foreign exchange markets: Evidence from the electronic broking system

This paper examines intraday patterns of the exchange rate behavior, using the “firm” bid–ask quotes and transactions of USD-JPY and Euro-USD recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intraday activities (deals and price changes) is confirmed for Tokyo and London participants, but not for New York participants. Activities do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). Return volatility is found to have intraday patterns similar to those of activities, and volatility and the bid–ask spread is negatively correlated. A negative correlation is observed between the number of deals and the width of bid–ask spread during business hours. It is also found that the concentration of transaction during overlapping business hours between Tokyo and London markets (London and New York markets) may arise from heterogeneous expectations among participants from different regions. J. Japanese Int. Economies 20 (4) (2006) 637–664.     

Thinking About the Liquidity Trap

The phenomenon of the liquidity trap—defined as a situation in which even a zero interest rate is insufficiently low to produce full employment—has taken on new importance with the persistent slump in Japan. This paper restates recent theoretical work on liquidity traps, drawing a link between “intertemporal” models that are mainly concerned with demonstrating the underlying logic, and more ad hoc models that bear directly on policy; it then reexamines policy alternatives, including fiscal stimulus and inflation targeting. J. Japan. Int. Econ., December 2000, 14(4), pp. 221–237. Woodrow Wilson School, Princeton University, Princeton, New Jersey 08544-1013 Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: E52, E58, E31, F31.     

Unemployment and Labor Market Institutions: An Empirical Analysis

The development of the unemployment rate differs substantially between OECD countries. In this paper we investigate to what extent these differences are related to labor market institutions. In our analysis we use data of eighteen OECD countries over the period 1960–1994 and show that the way in which institutions interact is important. J. Japan. Int. Econ., December 2001, 15(4), pp. 403–418. Department of Economics, CentER, Tilburg University and Institute for Labour Studies (OSA), The Netherlands. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E24, J68.     

A simple test of the effect of interest rate defense

High interest rates to defend the exchange rate signal that a government is committed to fixed exchange rates, but may also signal weak fundamentals. We test the effectiveness of the interest rate defense by disaggregating into the effects on future interest rates differentials, expectations of future exchange rates, and risk premia. While much previous empirical work has been inconclusive due to offsetting effects, tests that “disaggregate” the effects provide significant information. Raising overnight interest rates strengthens the exchange rate over the short-term, but also leads to an expected depreciation at a horizon of a year and longer and an increase in the risk premium, consistent with the argument that it also signals weak fundamentals. J. Japanese Int. Economies 20 (4) (2006) 612–636.     

Why is the gender earnings gap greater in Korea than in the United States?

It has long been recognized that the gender earnings gap varies across countries. This paper examines the relatively higher gender earnings gap found in the Korean labor market compared to the US labor market. Using the data set representative of the population for both countries, I found that the significant part of the differences in the gender earnings gap simply arise from the differences in the observed characteristics of women among two countries. In particular, relatively lower labor market experience, current job tenure, and educational attainment by Korean female workers play dominant roles in explaining the observed higher earnings gap. In addition, wage structure and labor market discrimination seem to be against Korean female workers compared to US female workers. J. Japanese Int. Economies 21 (4) (2007) 455–469.     

The Increasing Selectivity of Foreign Aid, 1984–2003

The Monterrey Consensus includes the idea that foreign aid is more effective when targeted to countries with sound institutions. We examine the extent to which foreign aid, bilateral and multilateral, is “selective” in terms of democracy and property rights/rule of law. We find that multilateral assistance is more selective than bilateral aid in targeting countries with good rule of law. “Selectivity” is a new phenomenon. During 1984–89, both bilateral and multilateral aid had significant negative relationships with rule of law; by 2000–03 this had shifted to a significant positive relationship for multilateral aid, and a positive but statistically insignificant relationship for bilateral aid.     

Quantitative easing and Japanese bank equity values

One of the primary motivations offered by the Bank of Japan (BOJ) for its quantitative easing program—whereby it maintained a current account balance target in excess of required reserves, effectively pegging short-term interest rates at zero—was to maintain credit extension by the troubled Japanese financial sector. We conduct an event study concerning the anticipated impact of quantitative easing on the Japanese banking sector by examining the impact of the introduction and expansion of the policy on Japanese bank equity values. We find that excess returns of Japanese banks were greater when increases in the BOJ current account balance target were accompanied by “non-standard” expansionary policies, such as raising the ceiling on BOJ purchases of long-term Japanese government bonds. We also provide cross-sectional evidence that suggests that the market perceived that the quantitative easing program would disproportionately benefit financially weaker Japanese banks. J. Japanese Int. Economies 20 (4) (2006) 699–721.     

Stock market rationality and price volatility: Tests using Japanese data

This paper tests the stock market rationality hypothesis, which implies that a stock price is determined as the discounted sum of optimally forecasted future dividends. Mankiw-Romer-Shapiro volatility tests and new volatility tests which do not use the unobservable “ex post rational price” are applied to the data from a stock market in Japan. A Hausman type specification test of the market rationality hypothesis is also developed and applied to the data. The results suggest that we cannot reject the hypothesis that the Japanese stock market is rational. A couple of variance inequalities are violated by the data but the violation does not seem to be significant. J. Japan. Int. Econ., December 1987, 1(4), pp. 441–462. Massachusetts Institute of Technology, Cambridge, MA 02139.     

A new institutional approach to pro-poor agricultural development: Lessons from Asia

Dr. Naya has been one of only two instructors of a course unique to the University of Hawaii called, “The Economics of Cooperation.” He was an early observer of deliberation councils and other institutions whereby the investment coordination problem was partly solved by extra-market cooperation in the East Asian “miracle” countries. These insights contributed to The Economics of Cooperation (1992), which featured the role of government as facilitator—a theme of Hawaii State Development Planning when Dr. Naya served on the Governor’s cabinet.Reconsidering government as a facilitator, and not as a replacement for markets, is one of the primary contributions of the New Institutional Economics (NIE). This paper extends and applies the facilitation perspective to the problem of agricultural development. Policy failures are detailed and sourced to the fallacy of misplaced exogeneity. In contrast, the method of fundamental explanation, inherent in NIE, acts as a corrective to misguided interventionism that has prevented pro-poor rural development from taking place.     

Europe and East Asia in the context of regionalization: Theory and economic policy

Much academic interest has recently centered on economic regionalism as a framework of international economic relations. The European Community (EC) has been a focal point. Other regional economic organizations (APEC, NAFTA), have been subjects of debate.This paper discusses three principal arguments: (1) the “natural”/“optimal” regional grouping, (2) transaction cost advantage in a regional model, and (3) the balancing of intraregional and extra-regional economies. Indeed, the argument is most certainly for an international regime of an “open,” not a “fortress” economic regionalism.This paper examines the subject relative to economic theory and policy.     

Beggar thy Neighbor? The Transmission of Fiscal Shocks from the US to Canada

This paper investigates how innovations in income taxes and government expenditures originating in the US affect the US economy, and how these effects are transmitted to the Canadian economy. Using a semi-structural VAR model and data for both countries for the 1961:1–2004:3 period, we find that fiscal policy innovations originating in the US are transmitted to the Canadian economy by international trade and capital flows through interest rate and exchange rate channels. Unanticipated shocks to US government expenditures have beggar thy neighbor effects on Canada. US output increases and Canadian output decreases in response to a positive shock to US government expenditures. In response to an unanticipated increase in US income taxes, US output declines while US and Canadian real interest rates rise. The response of Canadian output, however, is not significantly different from zero.