Uncovered interest parity in Central and Eastern Europe: Expectations and structural breaks

This paper examines the empirical validity of the hypothesis of uncovered interest parity (UIP) using data from five Central and Eastern European countries with floating exchange rates for the period 2003 to 2014. The analysis includes forward‐looking as well as static expectations and allows for different types of structural break. The variable depicting the deviation from strict UIP is stationary when expectations are forward looking, suggesting that it is not possible to reject the UIP hypothesis with a constant risk premium. The deviation from strict UIP is however typically not stationary when expectations are static, even when structural breaks are incorporated, leading to the rejection of the UIP hypothesis with a constant risk premium. The results underscore the central role of expectations for the UIP hypothesis.     

The role of foreign capital in domestic manufacturing productivity: empirical evidence from Asian economies

The paper empirically examines the relative contribution of foreign and domestic machinery and equipment on manufacturing productivity in seven Asian economies. A Cobb-Douglas production function is used to test whether foreign machinery is more productive than domestic machinery. The study is based on a pooled cross-sectional time-series model, including seven countries - Hong Kong, Singapore, South Korea, Malaysia, Indonesia, the Philippines and India - for the years 1975 to 1990. The results support the hypothesis that a country's stage of development, skill-level of its labour force, and the technology embodied in capital play a crucial role in determining the relative impact of foreign and domestic capital on manufacturing productivity.     

A Theory of Exchange Rates and the Term Structure of Interest Rates

This paper defines the concepts of indirect and direct risk premium effects and analyzes their properties in an exchange rate model. In the model, these effects are endogenously determined in a rational expectations equilibrium. For the effect of an interest rate shock, they have the opposite signs and the indirect risk premium effect can dominate the direct risk premium effect under reasonable parameters. This means that domestic short‐term bonds and foreign bonds are complements in the model even though domestic long‐term bonds and foreign bonds are substitutes. This model, focusing on the indirect risk premium effect and on the term structure of interest rates, can be combined with a small sample bias approach to explain stylized facts about the forward premium anomaly, which is found for short‐term interest rates, but not for long‐term interest rates.     

Has the Asian crisis changed the role of foreign investors in emerging equity markets: Taiwan's experience

This paper examines whether the 1997 Asian crisis changed the trading behaviors of foreign investors and of local institutional investors in Taiwan's stock market. There is little evidence that the Asian crisis changed the relationship between equity flows and market returns in Taiwan's stock market but there is evidence that volatility effects and volatility spillover were strengthened after the crisis. The general findings are (i) feedback trading arguments are much stronger than information arguments; (ii) relationships between returns and sale changes are the weakest but volatility effects using sale measures are the strongest; (iii) strong volatility effects and volatility spillover are found after the crisis; and (iv) the results for domestic institutional investors are slightly stronger than those for foreign investors.     

Sudden Stop and Sudden Flood of Foreign Direct Investment: Inverse Bank Run,Output, and Welfare Distribution

In this paper, I focus on a phenomenon that has not received much attention in the literature, namely that the mere expectation of foreign direct investment (FDI) incentivizes long‐maturity investment projects by domestic residents, and a Sudden Stop when expectations are frustrated. Long‐maturity investment projects enhance productivity but increase the economy's vulnerability to Sudden Stop. The discussion is framed in a context in which a Sudden Stop follows a surge of capital inflows (Sudden Flood), and FDI is concentrated on ongoing projects. A Sudden Stop episode can trigger a fire sale of long‐term assets, output collapse, and welfare redistribution, which is another ignored phenomenon.     

The expectations hypothesis of the term structure of interest rates and monetary policy: some evidence from Asian countries

This article outlines a panel data approach to modelling the term structure of interest rates in the short and in the long run. We find robust evidence supporting the expectations hypothesis of the term structure (EHTS) for a small sample of Asian emerging markets. Furthermore, we detect some relevant differences in the transmission mechanism of monetary policy, and the existence of a McCallum (2005) rule (no exogeneity of monetary policy to the yield curve) in some countries. Finally, we document the influence of an international global factor (i.e. a time-varying global risk premium) on the yield curve, while local country-specific factors are not statistically significant.     

技术吸收、技术改造与国内外技术获取 ——基于高技术产业静态与动态面板数据

利用外部技术还是发展内部技术是企业面临的重大选择，国外技术引进和国内技术购买则为这一选择增加了难度。基于2003—2017年《中国高技术产业年鉴》分地区面板数据，采用多种计量方法对高技术产业企业是引进国外技术还是购买国内技术的问题进行验证。结果表明，技术吸收对企业引进国内外技术具有显著促进作用，技术改造对国外技术引进和国内技术购买的影响均显著为负，并且两个关键变量的交叉项和滞后项也显著，这一结果在稳健性检验后仍然成立。同时，企业自办机构研发对国外技术引进和国内技术购买的影响亦显著，但方向不确定。上述结果表明，技术吸收能力和技术改造能力及自主创新对于企业是选择国外技术引进还是国内技术购买具有重要影响。     

Separating short-term and long-term inflation expectations using observations from financial markets

The analysis of inflation expectations is extended by distinguishing between short-term and long-term expectations using data from financial markets. The term structure of inflation expectation is explicitly considered. The adaptive expectations hypothesis obtains strong support from the data, while the Frenkel hypothesis can clearly be rejected. This result is clearly at variance with those obtained in Lahiri (1981).     

Modelling the business cycle of a small open economy: The Reserve Bank of New Zealand's DSGE model

We describe the underlying structure of the new forecast and policy model used at the Reserve Bank of New Zealand and evaluate its ability to explain New Zealand data. Unlike other estimated small-open-economy DSGE models, we find that more than one third of the domestic GDP growth is driven by foreign shocks. The elevated contribution of foreign shocks to the domestic economy is driven by our decision to exclude mapping export demand to data on world GDP. Estimating our model without any foreign demand data limits the response of exports to the real exchange variations. This feature makes exports and, consequently, domestic GDP much more sensitive to variations to foreign demand and raises the importance of foreign shocks to the domestic business cycle. Furthermore, our analysis suggests that a model with “adaptive” expectations is preferred by the data relative to the version of the model with “rational” expectations. In that case, the model explains nominal variables using on average much smaller shocks.     

THE IMPACT OF FOREIGN CAPITAL ON MACROECONOMIC PERFORMANCE IN CENTRAL ASIA

This paper investigates the short‐run impact of shocks in international capital flows channeled through foreign direct investment (FDI) and foreign aid on national output and export performance in five Central Asian economies under a dynamic multivariate structural vector autoregressive (SVAR) framework. The identification of structural shocks is implemented by AB model based on IS‐LM‐BP postulates. The main message is that external capital shocks are persistent and small open economies are weak to absorb them. Overall, the aid shocks reduce national outputs, while FDI increase it, on average. The expansion of global demand (G20) leads to an increase in domestic GDPs, notably in Kazakhstan, Kyrgyzstan and Uzbekistan. The impact is augmented by a positive effect of FDI on export channel (and net exports) that shift the IS curve upwards. We cannot find any significant aid‐FDI nexus in the region, except in Kazakhstan. The structural variance decomposition (SFEVD) results suggest that external flows and foreign demand together explain the bigger part of variability in domestic GDP and exports. Finally, variations in foreign capital, aid and FDI, are mainly explained by series themselves. The role of domestic activities is found to be weaker for aid and greater for FDI. The results could be attributed to rigid exchange rates, high trade dependence, and necessity for foreign capital to explore natural resources in Central Asian region. Our results provide some valuable suggestions to improve an investment climate for boosting economic growth.     

Modeling Expectation Formation Involving Several Sources of Information

Abstract. Experimental studies of expectation formation of subjects are predominantly limited to the prediction of one single time series despite the practical relevance of expectations in situations with multiple sources of information. In this paper, we report on an experiment in which subjects are given time series (indicators) as additional information for the judgemental forecast of a stationary time series. The quality and the number of these indicators are varied in three versions of a forecasting experiment. We explore the effects on forecasting accuracy and we test the average forecasts of the subjects for consistency with the rational expectations hypothesis. A simple heuristic is presented that explains the average forecasting behavior better than the rational expectations if indicators are presented to the subjects. It is demonstrated by a simulation study that this result is representative for the considered stationary stochastic processes.     

Forward rates and the expectations theory of the term structure: Tests for the Federal Republic of Germany

The expectations theory of the term structure was tested using data from West German capital and money markets for the period 1975:01–1986:12. If forward rates implicit in the term structure are market expectations of future spot rates, and if term premia are not time-dependent, then forward rates should follow a martingale sequence. This hypothesis was tested with the aid of standard time series techniques (autocorrelation functions, Box-Pierce, unit-roots,F-tests and co-integration). The expectations theory was for the most part rejected, although the martingale property, or equivalently, weak form efficiency, held for the latter part of the test period. The rejection of the simple expectations theory is consistent with the hypothesis of time-varying term premia. The author thanks an anonymous referee and especially Prof. Dr. J. Wolters (Free University of Berlin) for helpful comments and criticism.     

Nonstationarity,cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.     

Export Flexibility and Hedging

The paper considers a risk-averse international firm which sells its output in either the domestic or the foreign market. The firm possesses export flexibility, and so it can choose between the domestic and export markets after considering the foreign exchange rate. It is shown that a separation property holds if the proper hedging instrument is used: the firm's production depends on market prices and technology and does not depend on its attitude towards risk nor on its expectations. A full-hedge proposition is derived.     

Inflation and real short-term interest rates - A Kalman filter analysis of the term structure

This paper applies the Kalman filter technique to look at the relationship among real interest rates, inflation, and the term structure of interest rate under the expectations hypothesis. Using quarterly data from 1960:1 to 1991:1 for inflation, three month nominal short term interest rates and long term yields with maturities from one to five years, this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time-varying premium and a random-walk real interest rate. In other words, a reconciliation of the expectations hypothesis with the data is attained by assuming time-varying term premium and non-stationary real interest rate.     

Structural Change Tests in Tail Behaviour and the Asian Crisis

This paper explores tests of the hypothesis that the tail thickness of a distribution is constant over time. Using Hill's conditional maximum likelihood estimator for the tail index of a distribution, tests of tail shape constancy are constructed that allow for an unknown breakpoint. The recursive test is shown to be inconsistent in one direction, and only a one-sided test is recommended. Specifically, the test can be used when the alternative hypothesis is that the tail index decreases over time. A rolling and sequential version of the test is consistent in both directions. The methods are illustrated on recent stock price data for Thailand, Malaysia and Indonesia. The period covers the recent Asian financial crisis and enables us to assess whether breakpoints in domestic asset return distributions are related to known changes in institutional arrangements in the foreign currency markets of these countries.     

Term Spreads,Forward Rates and Yield Curve Forecasts

The expectations hypothesis contends that long rates should equal expected forthcoming average short rates. The spread between long and short rates should therefore forecast changes in short rates. In addition, forward rates should anticipate future spot rates. We present econometric evidence for the Euro area in the period from September 2004 to August 2018. In our sample, term spreads are negatively correlated to subsequent interest rate changes. The difference between forward and spot rates is conversely positively correlated to ensuing spot rate changes. Further regression analysis shows, that nominal interest rates do not have predictive properties for future inflation. A vector autoregression analysis whilst revealing medium term overconfidence of Euro area investors, suggests that the propositions of the expectations hypothesis should hold over relatively long periods of time.     

Foreign firm entry in an open economy: the case of Portugal

The purpose of this paper is to analyse the entry process of foreign direct investment (FDI) in Portuguese industrial sectors. Portugal presents an interesting case where firms enter to take advantage of export opportunities. The results suggest that foreign firms possess the ability to overcome existing entry barriers that affect domestic firms. Apparently, foreign firms have different expectations about profitability than domestic firms, possibly due to foreign firms’ export-orientation to the rest of the European Union (EU). They appear to desire industries where other foreign firms have clustered. Above all, it appears that these foreign firms enter industries to exploit Portugal's chief location advantage in Western Europe: low wages. Portugal's FDI experience is relevant to other countries that have opened their economies to greater trade and investment and attracted export-oriented firms.     

The expectations theory of the term structure: Evidence from inflation forecasts

This paper tests the joint hypothesis of rational expectations and the expectations theory of the term structure using the Livingston survey data on price inflation forecasts. For a variety of sample periods, the paper presents evidence that the data are consistent with the theory. Since inflation forecasts, unlike interest rates, are not linked to specific underlying financial assets, the relationship between longterm and short-term inflation forecasts should not embody risk premia. This paper's findings therefore lend support to the view that a time-varying risk premium is needed to explain the observed term structure of interest rates.