The dilemma of exchange rate arrangements in East Asia

This paper analyzes exchange rate flexibility in East Asia and explores what has changed since the Asian financial crisis. Our focus is not on the choice of an appropriate exchange rate regime in East Asia, but rather on exchange rate flexibility and management in the region. We find that exchange rate management in East Asia differs based on the country and the time period. We identify major concerns about current exchange rate arrangements in East Asia, including asymmetric responses to external shocks, competitive devaluation, and the dilemma of choosing between asset dollarization and liability dollarization. The paper concludes with some policy implications for an exchange rate arrangement in East Asia.     

Exchange rate volatility,international trade and labour demand

The purpose of this study is to assess under what conditions exchange rate volatility generates a positive effect on an exporting firm’s labour demand. As the exchange rate volatility increases, so does the value of the export option, provided that firms are flexible with respect to international trade. Higher volatility increases the potential gains from trade and can increase the demand for labour. The firm’s trade flexibility can be interpreted as a real hedging strategy when financial markets are incomplete. In many newly industrializing countries and emerging economies financial markets are imperfect or risk sharing markets are just starting to develop at a rather slow pace.     

Impact of exchange rate volatility on Indonesia's trade performance in the 1990s

Whether a real devaluation ultimately proves to be expansionary or contractionary depends on whether the boost given to the exportables sector offsets any possible output-depressing effects that may accompany the expenditure-switching policy. Failure of the exportables sector to adequately respond to the price incentives is a virtual guarantee that devaluation will be contractionary. This appears to have been the experience of Indonesia, the country worst hit by the crisis of 1997–1998. This paper explores whether the increased exchange rate variability of the Indonesian rupiah post 1997 may have been a cause for the country's poor export performance. J. Japanese Int. Economies 18 (2) (2004) 218–240.     

Unanticipated exchange rate variability and the growth of international trade

Zusammenfassung Unerwartete Wechselkursschwankungen und das Wachstum des internationalen Handels. - Der Verfasser untersucht die oft zitierte These, die Wechselkursvariabilit?t habe den internationalen Handel beeintr?chtigt. Im Gegensatz zu früheren Arbeiten formuliert und sch?tzt er ein Modell mit zwei Gleichungen. Davon sch?tzt die erste die Bestimmungsgründe der Variabilit?t der realen Wechselkurse mit dem Ziel, zwischen den erwarteten und den unerwarteten Komponenten dieser Variabilit?t unterscheiden zu k?nnen. Die zweite ist eine Gleichung in reduzierter Form für die Bestimmungsgründe des Wachstums realer Exporte. Diese wird zum Testen der Hypothese benutzt, da? nur die unerwarteten Schwankungen der realen Wechselkurse das Wachstum der realen Exporte signifikant beeinflussen. Die Ergebnisse best?tigen diese Hypothese.

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Résumé La variabilité non-prévue des taux de change et l’accroissement du commerce international. - Dans cette étude l’auteur examine l’hypothèse souvent-citée que la variabilité des taux de change a empêché l’accroissement du commerce international. Contraire aux études antérieures, il formule et estime un modèle à deux équations. La première équation évalue les facteurs déterminants de la variabilité des taux de change réels pour différencier entre les éléments prévus et non-prévus de la variabilité des taux de change réels. La deuxième est une équation à forme réduite et contient les facteurs déterminants de l’accroissement des exportations réelles. Ce mod?le est utilisé pour vérifier l’hypothèse que seulement la variabilité non-prévue des taux de change réels a un effet significatif sur l’accroissement des exportations réelles. Les résultats confirment l’hypothèse.

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Resumen Variabilidad no anticipada de la tasa de cambio y el crecimiento del comercio international. - En este trabajo se investiga la muy citada hipótesis de que la variabilidad de la tasa de cambio ha inhibido el crecimiento del comercio internacional. A diferencia de trabajos previos, se formula y estima un modelo biecuacional. La primera ecuación estima las determinantes de la variabilidad de la tasa de cambio real (REER), con el fin de distinguir entre los componentes anticipados y no anticipados de la variabilidad de la REER. La segunda es una ecuación en forma reducida para las déterminantes del crecimiento real de las exportaciones. Se utiliza este modelo para llevar a cabo un test de la hipótesis de que sólo la variabilidad no anticipada de la REER afecta significativamente el crecimiento real del volumen de exportaciones. Los resultados indican que la variabilidad no anticipada de la REER ha inhibido el crecimiento de las exportaciones, mientras que la variabilidad anticipada no ha tenido efecto alguno.

     

商业银行国际贸易融资汇率风险防范研究

国际贸易融资业务目前已成为许多国际性银行的主要业务之一。针对我国汇改后商业银行开展国际贸易融资业务中最主要的汇率风险,商业银行应利用金融衍生产品规避风险,并采取相应的对策措施。     

Output volatility of five crisis-affected East Asia economies

A decade has passed since the Asian financial crisis (AFC) in 1997, and attention is drawn to the output performance of the crisis-affected economies in East Asia. Using the Hodrick–Prescott (HP) filter, this paper examines the growth volatility of GDP, its components and the stock market of five East Asia economies of Japan, Singapore, South Korea, Chinese Taipei and Hong Kong Special Administrative Region (SAR). Empirical evidences based on quarterly data show that output volatility for both Singapore and South Korea has increased after the AFC. For the GDP components, trade is a major factor in lowering GDP volatility in Chinese Taipei. The Hong Kong SAR economy has experienced an increase/decrease in the volatility of investment/private consumption. Among the five East Asia economies, government intervention is obvious in Singapore. The stock markets in both Hong Kong SAR and Chinese Taipei showed stronger ability in absorbing shocks.     

The exchange rate and the trade balance

Exchange rate flexibility is commonly justified as an efficient method for adjusting the trade balance to some desirable net international capital flow. In this orthodox view, fluctuations in a country's terms of trade or its saving-investment balance would continually upset its balance of payments equilibrium if the nominal exchange rate remained rigid.But this prevailing doctrine favoring exchange flexibility is only correct when economies are insular, ie. have limited trade and financial arbitrage with the outside world. With the spread of exchange controls and trade restrictions in the 1930s into the 1950s, the industrial countries became somewhat insulated from each other. A devaluation could then have the conventional effect of reducing a trade deficit because monetary and exchange rate policy were separable.Among the open industrial economies of the 1980s, however, financial arbitrage is uninhibited and trade is fairly free. Monetary policy, both current and prospective, now dominates what happens to the exchange rate. Because a devaluation today reflects an easier money policy in the present, or an expected easing in the future, it no longer has any predictable impact on the monetary value of the net trade balance. Exchange rate flexibility loses its usefulness in controlling net exports while becoming highly disruptive to the economy's macroeconomic stability.For example, the American dollar's downard float over the past three years should not be (have been) expected to improve the U.S. current account. However, allowing the dollar to depreciate below its purchasing power parity greatly increases the inflationary potential in the Americian economy.     

论汇率对国际直接投资的传导效应

本文从分析汇率变化对国际直接投资可能带来的影响入手，应用理论和实证分析的方法，阐明了汇率对国际直接投资的传导效应。汇率波动对国际直接投资的影响具有滞后性，直接性，但当我们深入研究和分析跨国公司在海外经营活动的动机和方向时，汇率的变动无疑是值得重视的因素之一。     

Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem

Capital Controls and International Trade Finance in a Dual Exchange Rate Regime: The Belgian Experience Post-Mortem. — The purpose of the paper is to model “leads and lags” capital flows on the official segment of a dual exchange market and to examine the effects of various types of capital controls imposed by authorities on the official spot and forward exchange markets. The focus of the analysis is the degree of insulation provided by a “dual exchange market cum capital controls” in face of a speculative crisis. The crucial variables in this respect are the deviation from covered interest parity and the forward risk premium. Results of the theoretical model are confronted with empirical evidence over the 1975–85 period.     

Effect of exchange rate risk on intra-EC trade

Summary The smooth development of the EMS towrds an exchange rate system with fixed exchange rates among its member countries recently came to an abrupt (temporary) end. This raises the question whether exchange rate volatility is damaging to international trade. So far, it has remained an open empirical question whether exchange rate variability has the presumed negative effects. This article shows that the exports of five countries participating in the ERM have substantially benefited from the diminische exchange rate risk in the period from 1979 up to and including 1990. Contrary to former empirical studies, which deal with figures for total trade or total trade or total manufactures, the analysis here has been conducted for exports broken down by type of product. The study suggests that a more disaggregated analysis, with respect to products or sectors, might be a fruitful way of identifying the effects of exchange rate volatility on international trade.     

Effect of exchange rate return on volatility spill-over across trading regions

This paper examines the effect of realized exchange rate returns on the volatility spill-over between the euro–US dollar and US dollar–yen currency pairs across the five trading regions: Asia, Asia–Europe overlap, Europe, Europe–America overlap and America. Modelling the interaction between returns and volatility in an autoregressive five-equation system, we find evidence that depreciation of the US dollar against the yen has a greater impact on the US dollar–yen volatility spill-over than appreciation in the subprime crisis period. Appreciation and depreciation of the US dollar against the euro does not appear to have an asymmetric effect on the euro–US dollar volatility spill-over. Our results support the notion that the yen may have been preferred to the euro as a ‘safe-haven’ currency relative to the US dollar during the subprime crisis period.     

Vertical intra-industry trade and foreign direct investment in East Asia

As economic integration in East Asia progresses, trade patterns within the region are displaying an ever-greater complexity: Though inter-industry trade still accounts for the majority, its share in overall trade is declining. Instead, intra-industry trade (IIT), which can be further divided into horizontal IIT (HIIT) and vertical IIT (VIIT), is growing in importance.In this paper, we set out to measure and examine vertical intra-industry trade patterns in the East Asian region and compare these with the results of previous studies focusing on the EU, to which such analyses so far have been confined. Based on the supposition that VIIT is closely related to offshore production by multinational enterprises, we then develop a model to capture the main determinants of VIIT that explicitly includes the role of FDI. The model is tested empirically using data from the electrical machinery industry. The findings support our hypothesis, showing that FDI plays a significant role in the rapid increase in VIIT in East Asia seen in recent years. J. Japanese Int. Economies 17 (4) (2003) 468–506.     

The role of production fragmentation in international business cycle synchronization in East Asia

This paper analyzes factors contributing to the observed increase in international business cycle synchronization between eight East Asian developing countries and the major developed economies of Japan and the United States. To this end, a two-country dynamic general equilibrium (DGE) model is proposed which focuses on the role of production fragmentation among these countries. A key feature of the model is that it includes the trade in differentiated capital goods, which are added to the capital stock for production, and the technology embodied in these capital goods. The parameters of the model are calibrated using actual data of the countries included. Model simulations are conducted for two periods (1993–1997 and 1999–2005), before and after the Asian financial crisis, showing that the increase in business cycle synchronization can be attributed mainly to the growing fragmentation of production activities.     

International macroeconomic announcements and intraday euro exchange rate volatility

The short-run reaction of Euro returns volatility to a wide range of macroeconomic announcements is investigated using 5-min returns for spot Euro–Dollar, Euro–Sterling and Euro–Yen exchange rates. The marginal impact of each individual macroeconomic announcement on volatility is isolated whilst controlling for the distinct intraday volatility pattern, calendar effects, and a latent, longer run volatility factor simultaneously. Macroeconomic news announcements from the US are found to cause the vast majority of the statistically significant responses in volatility, with US monetary policy and real activity announcements causing the largest reactions of volatility across the three rates. ECB interest rate decisions are also important for all three rates, whilst UK Industrial Production and Japanese GDP cause large responses for the Euro–Sterling and Euro–Yen rates, respectively. Additionally, forward looking indicators and regional economic surveys, the release timing of which is such that they are the first indicators of macroeconomic performance that traders observe for a particular month, are also found to play a significant role.     

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.     

Restructuring East Asian exchange rate regimes

This paper investigated the degree of misalignment of the East Asian currencies against the U.S. dollar and against the Japanese yen under a de facto dollar-pegged exchange rate regime (January 1995 to May 1997). We found that overvaluation against the yen started in the Malaysian ringgit and the Philippine peso from January 1996 and the Thai baht from June 1996. Although the Indonesian rupiah and the Korean won against the yen were still undervalued in May 1997, degree of misalignment of both currencies narrowed from April 1995. Large withdrawal of Japanese claims after the financial crisis reduced Japanese bank lendings from $123.8 billion to $85.9 billion in end-June 1998. In 1998, Japanese Foreign Direct Investment (FDI) to East Asia fell as much as 44% from the previous year. In conclusion the paper stresses the importance of the stability in yen/dollar exchange rate to avoid large volatility in Japanese capital flow.     

The effect of intellectual property rights on international trade and investment

The Effect of Intellectual Property Rights on International Trade and Investment. — The widespread debate regarding extended recognition of intellectual property rights across borders has not been matched by empirical investigation regarding the effect of such international recognition of intellectual property as exists in the status quo. In this paper, the effects of membership in intellectual property treaties is investigated in the context of U.S. exports, foreign affiliate sales, and flows of royalties and license fees. Membership in intellectual property treaties increases the flows of payments and receipts for intellectual property as long as domestic patent protection is sufficiently strong. U.S. parents export more to subsidiaries in countries which do not adhere to such treaties, but their impact on arms’-length exports and foreign investment is minimal.     

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.