On China’s Exchange Rate Flexibility and Stability: The More Flexible against the U.S. Dollar, the More Stable in Effective Terms

I. IntroductionFor many years, the Chinese authorities have often expressed their appreciation for the merits of a flexible exchange rate regime for China and their willingness to make the exchange rate of the renminbi, China’s national currency, be determined by market forces. 1 In the same breath, however, they also stressed the importance of a “stable exchange rate” forChina, although it is not clear what the authorities meant by a “stable exchange rate.” (The People’s bank of Chin…     

The trade credit channel revisited: evidence from micro data of Japanese small firms

It is suggested that trade credit can be a substitute for bank loans for small- and medium-sized enterprises (SMEs) that have little access to external funding sources. Using unique cross-sectional survey data of Japanese SMEs, we conduct a deep investigation into the substitutability between bank loans and trade credit. This survey contains rich information on the suppliers of trade credit to SMEs, thus enabling the examination of the channel through which credit is provided from suppliers to customers. We find that SMEs with little access to bank credit depend more on large suppliers for trade credit. We also find that when a purchase is made from a large supplier, more credit is indeed provided in the form of trade credit. Furthermore, this channel of credit from large suppliers to SMEs is only observed for solvent customers, not for insolvent customers. Our findings suggest that trade credit plays an important role for entrepreneurial firms over the financial growth cycle. For young and small firms with little access to bank loans trade credit is an important funding source.     

DOES INVESTOR PROTECTION INCREASE FOREIGN DIRECT INVESTMENT? A META‐ANALYSIS

We undertake a meta‐analysis of the effects of international investment agreements for the protection of foreign investors on foreign direct investment using 2107 estimates drawn from 74 studies. Our meta‐analysis finds robust evidence that effect of international investment agreements is so small as to be considered zero.  However, our results do not rule out the possibility that the effect of these agreements is, in fact, positive and that current research methods are insufficiently powerful or precise to identify the underlying genuine effect. FDI from developed countries appears to be more responsive to the existence of investment protection, and there is evidence of publication–selection bias in favour of studies that find a positive effect for investor protection.     

Monetary policy and learning from the central bank's forecast

We examine the expectational stability (E-stability) of rational expectations equilibrium (REE) in a standard New Keynesian model in which private agents refer to the central bank's forecast in the process of adaptive learning. To satisfy the E-stability condition in this environment, the central bank must respond more strongly to the expected inflation rate than the extent to which the Taylor principle suggests. However, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy requires responding to the current inflation rate to a certain degree.     

POST‐PRIVATIZATION OWNERSHIP AND FIRM PERFORMANCE: A LARGE META‐ANALYSIS OF THE TRANSITION LITERATURE

This paper aims to perform a large‐scale meta‐analysis of the relationship between post‐privatization ownership and firm performance in Central and Eastern Europe and the former Soviet Union. Baseline estimation of a meta‐regression model that employs a total of 2,894 estimates drawn from 121 previous studies indicated the superior impact of foreign ownership on firm performance in comparison with state and domestic private entities. Furthermore, the estimation of an extended meta‐regression model that explicitly controls for the idiosyncrasies of transition economies and privatization policies strongly suggested that differences between countries in location, privatization method, and speed of policy implementation strongly influence the link between post‐privatization ownership structure and firm performance. We also found that these factors not only cause a remarkable gap between countries in terms of ex post improvement in firm performance but also significantly affect the interrelationship between foreign investors, domestic outsider owners, and firm managers, and the relative superiority of various domestic outsiders. Conclusive evidence of the harm caused to ex post firm performance by voucher privatization is one of the most noteworthy empirical findings in this paper.     

An analysis of geographical agglomeration and modularized industrial networks in a regional cluster: A case study at Yamagata prefecture in Japan

In a regional innovation system, a dense inter-organizational network within the region is recognized as a key factor in enhancing knowledge diffusion, regional learning, and effective resource transfers. Therefore, understanding the network structure and physical proximity of organizations is essential. In this paper, we investigated the industrial structure of Yamagata prefecture in Japan as a case study. Because Yamagata is a representative industrial region, the analysis can also provide an insight into other industrial regions. Initially, we investigated the geographical dispersion of firms and found them to be agglomerated along Route 13 and the Tohoku Shinkansen railroad, indicating that infrastructures for transportation still have a decisive role in terms of site location. Subsequently, we analyzed the modular structure of the inter-firm network. The results showed that hub firms construct a different type of network and play different roles within the inter-firm network, reflecting their strategic choice. The results also showed that there is a tendency for firms to transact with those in close proximity, and that firm location is also affected by the location of the hub firm in the module in addition to the infrastructures.     

Effect of agglomeration on technical efficiency of small and medium‐sized garment firms in Egypt

This study investigates the effect of agglomeration on technical efficiency of small and medium‐sized garment firms in Egypt. Using a sample of 502 firms, we estimated a translog stochastic frontier production function with inefficiency components. We also applied a switching regression model to address self‐selection in choice of agglomeration. Results confirm that agglomeration enhances technical efficiency of sampled firms through development of industrial linkages and accumulation of human capital. Given the increasing importance of cluster‐based development policies, we underscore the need to promote agglomeration of garment firms, and thereby foster forward and backward linkages to improve their efficiency and to develop global value chains.     

Folk theorem with communication

This paper proves a new folk theorem for repeated games with private monitoring and communication, extending the idea of delayed communication in Compte [O. Compte, Communication in repeated games with imperfect private monitoring, Econometrica 66 (1998) 597-626] to the case where private signals are correlated.The sufficient condition for the folk theorem is generically satisfied with more than two players, even when other well-known conditions are not. The folk theorem also applies to some two-players repeated games.     

Stable Shareholdings,the Decision Horizon Problem and Earnings Smoothing

Prior studies argue that stable shareholders do not encourage firm managers to manage their earnings to achieve short‐term earnings goals. They also state that firm managers with stable shareholders have an incentive to report smooth earnings to maintain long‐term relationships with such shareholders. We focus on cross‐shareholdings and stable shareholdings owned by financial institutions as stable shareholdings in Japan, and investigate the effect of these ownership structures on earnings management patterns. Specifically, we hypothesize that stable shareholdings are positively associated with the informational components of earnings smoothing. Consistent with our hypothesis, we first find that as stable shareholdings increase, managers are more likely to conduct earnings smoothing that provides useful information to stable shareholders. Further, our additional analysis shows that stable shareholdings reduce incentives for managers to cut discretionary expenditures to meet short‐term earnings benchmarks, implying that stable shareholdings could reduce the possibility of a myopic problem. These results suggest that managers with stable shareholdings tend to report smoother and less volatile earnings, and do not tend to pursue earnings management to attain short‐term earnings targets.