Financial market integration,exchange rate policy,and the dynamics of business and employment in Korea

We study the consequences of different degrees of international financial market integration and exchange rate policies in a calibrated, medium-scale model of the Korean economy. The model features endogenous producer entry into domestic and export markets and search-and-matching frictions in labor markets. This allows us to highlight the consequences of financial integration and the exchange rate regime for the dynamics of business creation and unemployment. We show that, under flexible exchange rates, access to international financial markets increases the volatility of both business creation and the number of exporting plants, but the effects on employment volatility are more modest. Pegging the exchange rate can have unfavorable consequences for the effects of terms of trade appreciation, but more financial integration is beneficial under a peg if the economy is subject to both productivity and terms of trade shocks. The combination of a floating exchange rate and internationally complete markets would be the best scenario for Korea among those we focus on.     

Exploring the Margins of Dutch Exports: A Firm-Level Analysis

This paper utilizes new Dutch transaction-level data on international trade to investigate the microeconomic patterns of Dutch exports. First, we show that self-selection based on ex-ante productivity drives firms’ export decisions, which we subsequently relate to various sources of fixed market-entry costs: governance and regulatory quality, the extent of corruption, and cultural proximity. Second, we provide evidence that firms learn to export by trial and error, so as to obtain experience in exporting and to gather knowledge about the potential of foreign markets. Such experimentation appears to be reflected in the volatility of a firm’s export product portfolio. More volatility is associated with a higher survival rate in the export market. Finally, we draw conclusions on the potential implications for trade policy.     

Exports and Productivity Growth: First Evidence from a Continuous Treatment Approach

A recent survey of 54 micro-econometric studies reveals that exporting firms are more productive than non-exporters. However, previous empirical studies show that exporting does not necessarily improve productivity. One possible reason for this result is that most previous studies are restricted to analysing the relationship between a firm’s export status and the growth of its labour productivity, using the firms’ export status as a binary treatment variable and comparing the performance of exporting and non-exporting firms. In this paper, we apply the newly developed generalised propensity score (GPS) methodology that allows for continuous treatment, that is, different levels of the firms’ export activities. Using the GPS method and a large panel data set for German manufacturing firms, we estimate the relationship between a firm’s export-sales ratio and its labour productivity growth rate. We find that there is a causal effect of firms’ export activities on labour productivity growth. However, exporting improves labour productivity growth only within a sub-interval of the range of firms’ export-sales ratios. JEL no.  F14, F23, L60     

Does exchange rate volatility deter Japan-China trade? Evidence from pre- and post-exchange rate reform in China

This paper is an empirical investigation of the effect of RMB-JPY volatility on Japan-China trade with a special emphasis on the impacts of the reform of the RMB exchange rate regime implemented on July 21, 2005. We estimated two types of volatility measures (one based on the ARCH model and the other the usual standard deviation) utilizing daily data from Jan. 2002 through Dec. 2011 and examined both short-run and long-run effects of this volatility on exports of each country to the other with an ARDL approach. The results indicate that Japan's exports to China are not affected by the exchange rate volatility, but China's exports to Japan are negatively influenced during the reform period. Furthermore, the level of the exchange rate has no influence on Japanese exports, but it has a significant impact on Chinese exports. This asymmetric result may be due to differences in the depth of financial markets and in the maturity of exporters of the two countries.     

Exchange Rate Regimes: Middling Through

Abstract

The appropriate exchange rate regime, in the context of integration of currency markets with financial markets and of large international capital flows, continues to be a policy dilemma. It is found that the majority of countries are moving towards somewhat higher exchange and lower interest rate volatility. Features of foreign exchange (forex) markets could be partly motivating these choices. A model with noise trading, non-traded goods and price rigidities shows that bounds on the volatility of the exchange rate can lower noise trading in forex markets; decrease fundamental variance and improve real fundamentals in an emerging market economy (EME); and give more monetary policy autonomy. Central banks prefer secret interventions where they have an information advantage or fear destabilizing speculation. But in the model discussed in this article, short-term pre-announced interventions can control exchange rate volatility, pre-empt deviations in prices and real exchange rates, and allow markets to help central banks achieve their targets. The long-term crawl need not be announced. In conclusion, the regime's applicability to an EME is explored.     

Exports versus FDI: do firms use FDI as a mechanism to smooth demand volatility?

In this paper, we first develop a simple two-period model of oligopoly to show that, under demand uncertainty, whether a firm chooses to serve foreign markets by exports or via foreign direct investment (FDI) may depend on demand volatility along with other well-known determinants such as size of market demand and trade costs. Although fast transport such as air shipment is an option for exporting firms to smooth volatile demand in foreign markets, market volatility may systematically trigger the firms to undertake FDI. We then use a rich panel of US firms’ sales to 56 countries between 1999 and 2004 to confront this theoretical prediction and show strong evidence in support of the prediction     

China＇s Exchange Rate and Financial Repression： The Conflicted Emergence of the RMB as an International Currency

Instability in the worm dollar standard, as most recently manifested in the US Federal Reserve＇s near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. China has been provoked into speeding RMB ＂internationalization ＂; that is, opening up domestic financial markets to reduce its dependence on the US dollar for invoicing trade and making international payments. However, despite rapid percentage growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls （reinforced by financial repression in domestic interest rates） to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating （appreciating） exchange rate could attract even more hot money inflows, the People＇s Bank of China should focus on keeping the yuan/dollar rate stable so as to encourage naturally high wage increases to help balance China ＂s international competitiveness. However, further internationalization of the RMB, as with the proposed Shanghai pilot free trade zone, is best deferred until world interest rates rise to more normal levels.     

Exports and Productivity Selection Effects for Dutch Firms

The paper tests whether recent theories of international trade with heterogeneous firms can explain the export patterns in Dutch firm- and plant- level data in manufacturing and services. Recent trade models with heterogeneous firms predict that the export decision of firms is affected by sunk entry costs in foreign markets, with only the most productive firms self-selecting into exports. We test a latent variable model of the export decision by probit regressions and standard OLS panel regressions. Our results support the self-selection prediction. The process further appears to be conditioned by scale effects, market structure and multinational affiliation. Regarding alternative explanations, we do not find evidence for the learning-by-exporting hypothesis, even when controlling for the firm’s distance to the international productivity frontier.     

Real financial market exchange rate volatility and portfolio flows

This paper studies the relationship between real financial market exchange rate volatility and US cross-border equity flows. We found strong evidence that causality goes from real financial market exchange rate volatility to equity flows. According to our results, real financial market exchange rate volatility negatively influences purchases of foreign equity. This finding is in line with the portfolio optimization theory. The impact of real financial market exchange rate volatility on sales of foreign equity is also negative. This result can be explained by the theory of behavioral finance which states that investors are reluctant to realize losses of their portfolios. This is why investors decrease sales of assets when riskiness of the assets increases. The impact of real financial market exchange rate on net purchases of foreign equity is positive. It follows from these results that sales of foreign equity decrease more strongly than purchases of foreign equity when riskiness of foreign assets increases.     

Public Procurement and Foreign Direct Investment Across France,Germany, Italy and the UK

Foreign direct investment (FDI) has become an important factor of economic development during the last decades. FDI contributes to the economic growth of the host economy through learning, diffusion of technology, positive externalities and capital inflows. Attracting FDI is currently an objective in its own right for many countries and this paper aims to identify policies affecting the multinational firm’s decision to establish a subsidiary. After accounting for labour productivity and trade openness, cross-section analysis, both industry-wise and country-wise, indicates that public procurement, especially “buy national” policies, and agglomeration economies are statistically significant determinants of FDI. Although our findings pertain to four large European economies, e.g. France, Germany, Italy and the UK, they constitute relevant policy guidelines for developing countries as well.      

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

Exchange Rate Volatility and International Trade

The purpose of this note is to show that a positive effect of exchange rate volatility on export production has a theoretical basis. The key to this claim is that, as the exchange rate volatility increases, so does the value of the real option to export to the world market. Higher volatility increases the potential gains from trade. This may explain part of the mixed empirical findings regarding the effects of exchange rate risk on international trade.     

Exchange Rate Volatility and Trade: An Empirical Investigation from Cross‐country Comparison

Abstract: This paper investigates empirically the impact of exchange rate volatility on the trade flows of six countries over the quarterly period of 1980–2005. The impact of a volatility term on trade is examined by using an Engle‐Granger residual‐based cointegrating technique. The major results show that increases in the volatility of the real exchange rate, approximating exchange‐rate uncertainty, exert a significant negative effect on trade for South Korea, Pakistan, Poland and South Africa and a positive effect for Turkey and Hungary in the long run.     

IMF Support and Inter-Regime Exchange Rate Volatility

It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons one has to account for ‘missing variables’ that compensate for the fundamental variables’ volatility under fixed exchange rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant compensating variable.     

A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility

We study the impact of Japanese foreign exchange intervention on the volatility of the yen/dollar exchange rate since the early 1990’s in a GARCH framework with interventions as exogenous variables. Using daily intervention data provided by the Japanese Ministry of Finance, we show that the effect of interventions varies over time. From 1991 up to the late 1990’s, Japanese foreign exchange intervention is associated with an increase in volatility of the yen/dollar exchange rate. After the year 1997, Japanese foreign exchange intervention correlates with reductions in exchange rate volatility. This can be explained by the fact that Japanese foreign exchange intervention remained quasi unsterilized in the liquidity trap.

Exchange rate volatility and agricultural trade under policy reforms in South Africa

Decades of government intervention have helped develop the South African agriculture sector to its present state. Policy reforms have included trade and exchange rate policies to increase the country's international competitiveness, reduce poverty and promote economic growth. These reforms are facilitating the growth in agricultural trade and South Africa's reintegration into the global economy. Annual agricultural exports and imports have increased. This paper uses annual data and a vector error-correction model to investigate the supply and demand relationships for agricultural trade flows in South Africa during the past four decades. The results show that prices, real exchange rates, domestic production capacity and real incomes have significant impacts on the country's agricultural trade. In particular, exchange rate volatility has negative impacts. This cannot be viewed solely as an exogenous source of macroeconomic instability in South Africa, as domestic policies play a crucial role in influencing the movement of exchange rates.     

The Declining Impact of Exchange Rate Volatility on Trade

The introduction of the euro in 1999 eliminated exchange rate volatility between the members of the eurozone. Despite the elimination of currency risks, trade flows within the eurozone hardly increased (Bun and Klaassen in Oxf Bull Econ Stat 69:473–496, 2007, Santos Silva and Tenreyro, 2009). Using a standard gravity model, we find that nominal exchange rate volatility has had a negative effect on trade before 1985 but that this effect disappeared in later years, coinciding with the introduction and rapid diffusion of over-the-counter currency swaps. The estimated coefficient for the euro dummy does not change when we include nominal exchange rate volatility as an additional regressor. This confirms our finding that the impact of exchange rate volatility on trade has been small in more recent years.     

Expected purchasing power parity

Conclusions The results of this study indicate that movements in the exchange rate are determined primarily by expected purchasing power parity. Expected future wholesale and consumer prices were both significantly related to the exchange rate. The coefficients were negative and close to unity. Finally, the results imply that expected future inflation can have an impact on a country’s terms of trade.     

The Impact of the US Interest Rate Hike on Emerging Market Economies and the Belt and Road Initiative

Since the end of 2015, the US Federal Reserve has raised its benchmark interest rate nine times. This has led to capital outflows and asset depreciation in many emerging market economies. The present paper examines the factors that determine the financial volatility of emerging markets in the face of external shocks. By calculating the capital flows of 30 emerging markets from 1990 to 2018 and conducting panel regression, this paper finds that countries with good infrastructure facilities, a sound banking system and high economic growth have significantly lower cross‐border financial risks. An implication from the empirical analysis is that emerging countries would benefit greatly by actively taking part in the Belt and Road Initiative. The framework of the Belt and Road Initiative allows emerging countries better access to China's massive consumer market to promote trade and long‐term growth. Their quality of infrastructure can be improved through cooperation with China in infrastructure investment. They can also jointly establish a cooperative financial framework to enhance regional financial stability. These strategies will reduce systematic financial risks and counteract the negative impacts of US interest rate hikes.     

Exchange rate volatility and ASEAN-4’s trade flows: is there a third country effect?

This paper investigates the impact of exchange rate volatility on the trade flows among ASEAN-4 countries (Indonesia, Malaysia, Singapore and Thailand) as well as to their five main trading partners. External volatility is included in the models to study the ‘third country’ effect on the trade flows. We employ annual import and export data over the period of 1980–2012. The results from the bounds testing approach to cointegration and error-correction model reveal that the real exchange rate volatility does play a significant role in 15 export and four import models in short-run and long-run. Moreover, in both import and export models, the effects of exchange rate volatility on trade flows are negative rather than positive. Finally, the effects of volatility from the ASEAN-4’s currency/yuan rate dominate the third country effect on the ASEAN-4’s trade.