Productivity Growth of the Nontradable Sectors in China

Little is known about the total factor productivity of the nontradable sectors in China. In this paper we estimate productivity growth of the nontradable sectors by studying the relative price movements of the nontradable sectors vis‐à‐vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the nontradable sectors have risen significantly faster than those of the tradable sectors since China's accession to the WTO, and as a result China's internal real exchange rate has appreciated faster than the renminbi real effective exchange rate. We also find that the nontradable sectors have seen much lower productivity growth than the tradable sectors. We argue that it is important to raise China's productivity growth in the nontradable sectors through policy actions to achieve growth rebalancing and containing inflationary pressures in the medium run.     

The East Asian Dollar Standard, Fear of Floating, and Original Sin

Before the crisis of 1997/98, the East Asian economies—except for Japan but including China—pegged their currencies to the US dollar. To avoid further turmoil, the IMF argues that these currencies should float more freely. However, the authors’ econometric estimations show that the dollar's predominant weight in East Asian currency baskets has returned to its pre‐crisis levels. By 2002, the day‐to‐day volatility of each country's exchange rate against the dollar had again become negligible. Most governments were rapidly accumulating a “war chest” of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of “original sin” applied to emerging‐market economies, the authors argue that this fear of floating is entirely rational from the perspective of each individual country. And their joint pegging to the dollar benefits the East Asian dollar bloc as a whole, although Japan remains an important outlier.     

ELECTIONS AND EXCHANGE RATE POLICY CYCLES

This paper presents a theoretical model based on the distributive effects of real exchange rate (RER) changes that generates RER electoral cycles of the type identified in Latin American countries: more appreciated RER before elections and more depreciated after elections. Typically, a RER depreciation favors exporters and import-competing domestic industries, to the detriment of consumers. These RER cycles are generated by imperfect information on policy-makers' preferences, which are concealed from voters with the help of an unstable macroeconomic environment. Exchange rate cycles result from the interplay between the electoral power of the non-tradable sector and the tradable sector's ability to lobby the government.     

Business Cycle Co‐movement between Australia and East Asia

This article analyses business cycle co‐movement between Australia and 10 major economies in the East‐Asian region by using two measures: concordance indices and correlation coefficients. The results from the concordance index suggest that Australia's business cycle is becoming increasingly synchronised with those in East Asia, particularly with China and Japan. The correlation coefficients of gross domestic product (GDP) growth and the deviation of real GDP from its trend between Australia and its East‐Asian neighbours are also significantly higher since 2000, relative to the correlation coefficients found for the 1990s. The growing importance of East Asia in Australia's economic future implies that the risks facing the economy have changed and Australia needs to engage in more macroeconomic policy dialogues with its neighbouring economies to improve their policy responses.     

Patterns of technological specialisation in Latin American and East Asian countries: an analysis of patents and trade flows

This article provides an extensive analysis of the technological specialisation of three Latin American countries (Argentina, Brazil and Mexico) and two East Asian countries (South Korea and Taiwan). Technological specialisation is measured both with respect to patents and trade flows. This article provides different measures of technological specialisation: Ricardian and Smithian specialisation indexes and the contribution to trade balance. These indicators provide a new picture of the evolution of the patterns of technological specialisation. Latin American countries show a divergent technological specialisation from East Asian countries, since the 1970s. In particular, Latin American countries display weaknesses in computers and communications and electrical and electronic sectors and their specialisation in fast growing technological classes is declining, in contrast to East Asian countries. While East Asian countries have shifted to specialised supplier or science-based sectors, Latin American countries have increased their trade specialisation in supplier-dominated or scale-intensive sectors.     

Export growth slowdown and currency crisis: the Malaysian experience

A slowdown in export growth occurred in all East Asian economies that were affected by the Asian currency crisis. Misaligned exchange rates have been widely cited as a cause of the slowdown. In the Malaysian context at least a vulnerability to the downturn in the electronic cycle could also be a major factor leading to poor export performance. Using the US/yen dollar rate as a proxy for exchange rate misalignment and US total new orders for electronics as a proxy for global electronics demand, cointegration analysis was used to establish the likely causes of a slowdown in Malaysia's export performance. Empirical results suggest that a unique long-run relationship exists between all three variables. The policy implications of these results including exchange rate monitoring and export diversification are discussed in the conclusion.     

The 1997 Asian Currency Crisis,Financial Linkages,and the Monetary Policy of Japan

The evidence is examined that excessively liberal monetary policy by the Bank of Japan, before and after the financial collapse of Japan in 1992, may have led other East Asian economies into “over‐borrowing” and speculative investments, prior to the currency crisis in 1997–98. The authors test for cointegration and Granger causality between Japanese money supply M1 and the domestic investment of eight East Asian economies and Australia. US and German money supplies are also used as a benchmark. There is strong evidence that there are long‐ and short‐run causal relationships between the Japanese money supply and the domestic investment of the Asian crisis‐inflicted economies prior to 1997.     

Reserve Requirements and Real Exchange Rate Misalignments in Emerging Market Economies

A popular policy target in emerging markets is the real exchange rate as an undervalued real exchange rate is seen to enhance international competitiveness. Within an augmented Dornbusch model it is shown that the implicit tax of low remunerated reserve requirements represents an efficient tool to depreciate the real exchange rate. The model is empirically tested for a panel of Latin American, East Asian and Eastern European countries. Controlling for the impact of fiscal policies and direct capital controls, the reserve requirement tax significantly explains real exchange rate misalignments.     

TOWARD A REGIONAL EXCHANGE RATE REGIME IN EAST ASIA

Abstract.  Deepening market-driven economic integration in East Asia makes intraregional exchange rate across the region increasingly desirable and necessary. The paper suggests that East Asia's emerging economies begin to choose a currency basket as a monetary policy anchor to enable all East Asian currencies to collectively appreciate vis-à-vis the US dollar, while maintaining intraregional rate stability, in the event of surges of capital inflows or a rapid unwinding of global payments imbalances. Following this initial step, East Asia may agree on more rigid intraregional exchange rate stabilization schemes through, for example, an Asian Snake or an Asian Exchange Rate Mechanism.     

Monetary policy credibility and exchange rate pass-through: Some evidence from emerging countries

Considering external constraints on monetary policy in emerging countries, we propose a semi-structural vector autoregressive model with exogenous variables (VARX) to examine the exchange rate pass-through to domestic prices. We demonstrate that a lower exchange rate pass-through is associated with a credible monetary policy aiming at controlling inflation. The empirical results suggest that the exchange rate pass-through is higher in Latin American countries than in East Asian countries. The exchange rate pass-through has declined after the adoption of an inflation targeting monetary policy.     

On the Future of Inflation Targeting in East Asia

This article analyzes the problems associated with inflation targeting (IT) regimes in a number of East Asian countries. It scrutinizes the policy conflicts that can arise when a central bank that has adopted a formal inflation target to guide the conduct of monetary policy simultaneously manages the exchange rate and pursues financial stability objectives. To this end, it empirically investigates the importance of exchange rate and terms of trade movements as determinants of inflation rates across East Asian economies and discusses the role of central banks in guarding financial stability and the ways this may conflict with an IT regime. The article argues that IT never really has been a suitable monetary framework for East Asian countries and that it should hence be supplanted by transparent monetary frameworks that explicitly recognize the multiple goals that are being pursued by East Asian central banks.     

Structural transformation and its implications for the Chinese economy

This study examines China's structural transformation under the assumption that its employment structure converges to that in major developed economies in one and a half decades. The required annual output differentials between tradable and nontradable sectors, productivity increment in the nontradable sector, and government expenditure increment are estimated with the goal of employment stability conditional on population ageing. It appears that labour transfer from the tradable sector to the nontradable sector would be accompanied by relatively large aggregate output changes due to population ageing and efficiency changes in the tradable sector. Consumer price and real exchange rates are less affected during structural transformation. Although fiscal deficit would increase, government expenditure as a tool to stabilize employment is welfare improving as long as job switching is not cost prohibitive.     

The impact of Chinese monetary policy shocks on East and South‐East Asia1

We study the effects of Chinese monetary policy shocks on China's major trading partners in East and South‐East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework, which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighbouring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies.     

Are wages equal across sectors of production?

The assumption that national labour markets are homogeneous across tradable and non‐tradable goods is common in multisector (open‐economy) macro models and crucial for the prominent Balassa–Samuelson hypothesis. To test it, this study introduces a novel, theory‐based method of distinguishing the tradable and non‐tradable sectors to the Balassa–Samuelson literature and employs modern empirical methods and a large and detailed macro dataset. It finds that both the internal relationship between productivity and wages in the tradable and non‐tradable sectors postulated by the Balassa–Samuelson hypothesis and its external transmission mechanism are rejected.     

Portfolio allocation and international risk sharing

Abstract We show that recent explanations of the consumption‐real exchange rate anomaly that rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a consumption‐real exchange rate correlation that is too high compared with the data even when there are many shocks. Monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds, both in the benchmark model with only tradable and non‐tradable sector supply shocks and also in the model that allows for news.     

Can a comparative capitalism approach explain fiscal policy activism?

This study investigates the implications of models of capitalism for the responsiveness of countries’ fiscal policies during business cycles using new data for member countries of the Organization for Economic Cooperation and Development and China. We expand the literature by adding the category of East Asian nonliberal capitalism to the established distinction of liberal market economies and nonliberal coordinated market economies. These three differ substantially not just in their fiscal policies, but also in monetary policies, degree of financial market orientation, exchange rate regime, and labor market organization. As in previous studies, we find that governments of liberal economies adopt more countercyclical fiscal policies. Departing from existing studies, however, among the nonliberal models of capitalism, (East Asian) state-led models have more countercyclical fiscal policies than (European) coordinated market economies, perhaps as countercyclical as liberal economies, both historically and during the 2007–9 crisis. This is due to less independent central banks, managed float of exchange rates, and limited financial market orientation and financial openness in East Asia, which allow for more active fiscal policy. Among political factors, left-of-center governments, fractionalized party systems, and election years are associated weakly with countercyclical fiscal policy, as expected. Labor market coordination and welfare generosity have unclear roles in regard to fiscal policy, a topic for future research.     

The new exchange rate policy in the Asian emerging economies – goodbye trouble,hello comfort?

In this paper, we discuss new aspects of exchange rate policy that can be observed in the Asian emerging economies. In the first place, we show the alternative regimes they may choose and their respective pros and cons. Secondly, we concentrate on the recent strategy of systematic undervaluation of one's currency – figuring prominently among ‘big’ Asian players such as China and India – and the most likely implications of such a strategy for domestic allocation, distribution and stabilization goals. With the background of Germany's experiences in 1969, almost on the eve of the Bretton Woods' system collapse, we model a speculative attack on an undervalued currency in the vein of the Flood–Garber seminal paper from 1984. Now, however, the country in concern (just like India and China) possesses strong rather than weak fundamentals. The continuous accumulation of international reserves, in addition, leads to the question of an ‘optimal management’ of foreign exchange reserves in Asian emerging economies with regard to size and composition. We finally propose a sequence of reforms/policies that should be implemented in those Asian emerging economies on their still long journey to a regime featured by autonomous monetary policy, flexible exchange rate and capital mobility. A brief summary and an outlook for future research close the paper.     

Investigating the Balassa‐Samuelson hypothesis in the transition: Do we understand what we see? A panel study

This paper studies the Balassa‐Samuelson (B‐S) effect in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. We use time series and panel cointegration techniques and show that the B‐S effect works reasonably well in the transition economies under study during the period from 1991:Q1 to 2001:Q2. However, we find, that productivity growth does not fully translate into price increases because of the construction of the CPI indexes. We therefore argue that productivity growth will not hinder meeting the Maastricht criterion on inflation in the medium term. In addition, the observed appreciation of the CPI‐deflated real exchange rate is found to be systematically higher compared with the real appreciation the B‐S effect could justify, especially in the cases of the Czech Republic and Slovakia. This can be partly explained by the trend appreciation of the tradable price‐based real exchange rate, increases in non‐tradable prices due to price liberalization and demand‐side pressures and the evolution of the nominal exchange rate determined by the nature of the exchange rate regime and the magnitude of capital inflows. JEL classification: E31, F31, O11, P17,     

REAL EXCHANGE RATE CYCLES AROUND ELECTIONS

We develop the implications of devaluation cycles for real exchange rates in a two-sector small open economy with a cash-in-advance constraint. Policy-makers are office-motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America.     

Choosing sides in the trilemma: international financial cycles and structural change in developing economies

ABSTRACT

This paper analyzes the impact of international financial cycles on structural change in developing economies. It is argued that the impact of these cycles depends on the specific combination of macroeconomic and industrial policies adopted by the developing economy. The cases of Brazil and Argentina are contrasted with those of Korea and China. In the Asian economies, macroeconomic policy has been a complementary tool along with industrial policy to foster the diversification of production and capabilities. Inversely, in the case of the Latin American countries, long periods of real exchange rate (RER) appreciation, combined with the weaknesses (or absence) of industrial policies, contributed to the loss of capabilities and lagging behind.