Determinants of business cycle comovement: a robust analysis

This paper investigates the determinants of business cycle comovement between countries. Our dataset includes over 100 countries, both developed and developing. We search for variables that are “robust” in explaining comovement, using the approach of Leamer (Amer. Econom. Rev. 73 (1983) 31). Variables considered are (i) bilateral trade between countries; (ii) total trade in each country; (iii) sectoral structure; (iv) similarity in export and import baskets; (v) factor endowments; and (vi) gravity variables. We find that bilateral trade is robust. However, two variables that the literature has argued are important for business cycles—industrial structure and currency unions—are found not to be robust.     

Is it punishment? Sovereign defaults and the decline in trade

Sovereign defaults are associated with declines in defaulting countries trade. Are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest? We devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines, bilateral trade with creditor countries should fall more than trade with other countries. We find that this is not the case. The analysis does not yield much evidence of broader punishment strategies including a league of major creditors either. These results contradict the predictions of the trade sanctions theory of sovereign borrowing.     

On What States Do Prices Depend? Answers From Ecuador

The frequency of retail price adjustment differs across goods, both in low inflationary environments, such has the United States, and in high inflationary environments typical of less developed countries. We develop a multishock menu cost model in which retailers intermediate trade between producers and consumers. Since the cost share of intermediate inputs varies across goods, the model produces a cross-sectional distribution of frequency of price adjustment even though firms face a common menu cost. The model is evaluated using a rich micropanel of retail prices in Ecuador in a period spanning a financial crisis and subsequent dollarization.     

Does Inflation Targeting Help Reduce Financial Dollarization?

We examine whether adopting an inflation‐targeting regime helps reduce financial dollarization as predicted by Ize and Levy Yeyati's ( 2003 ) portfolio model. To address the self‐selection problem of policy adoption, we apply a variety of propensity score matching methods to a large sample of 106 developing countries for the years 1985–2004. We find strong evidence that inflation targeting has large and significant treatment effects on lowering both actual financial dollarization and the model implied minimum variance portfolio dollarization. Our results are robust to alternative samples and model specifications and also to control for additional factors in postmatching regressions.     

What drives credit dollarization in transition economies?

This paper provides an in-depth analysis of the use of foreign currencies in the lending activities of banks in transition economies. The impact of bank and firm variables on credit dollarization is studied in an optimal portfolio allocation model and estimated using new aggregate data for 21 transition economies for the period 1990–2003. Empirical results provide evidence that credit dollarization is the combined outcome of domestic deposit dollarization and banks’ desire for currency-matched portfolios beyond regulatory requirements. The effects of international financial factors and natural hedges are less robust across alternative specifications. The paper further discusses the role of regulations in affecting the impact of these factors on credit dollarization and calls for more developed domestic forward foreign exchange markets.     

Current accounts and financial flows in the euro area

We construct a new database of bilateral financial flows among euro area countries and their major world partners and explore the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area. The data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the 'core' with deficits in the periphery went along financial rather than trade interlinkages. In particular, the data document the dominant role of 'core' countries in financing the euro area periphery's current account deficits before the financial crisis, both directly and through intermediating financial flows from outside of the euro area. Most of this financing took the form of debt instruments. Following the withdrawal of private financing from 'core' countries during the crisis, the ECB-mediated funding and other official flows helped the periphery to refinance its liabilities and smoothen the external adjustment.     

Financial dollarization: Short-run determinants in transition economies

This paper examines the determinants of financial dollarization in transition economies from a short-run perspective. Using aggregate monthly data of deposit and loan dollarization we study the drivers of short-term fluctuations in dollarization and test their importance at different levels of dollarization. The results provide evidence that (a) the positive (negative) short-run effects of depreciation (monetary expansion) on deposit dollarization are exacerbated in high-dollarization countries; (b) short-run loan dollarization is mainly driven by banks matching of domestic loans and deposits, currency matching of assets and liabilities, international financial integration, and institutional quality; and (c) both types of short-run dollarization are affected by interest rate differentials and deviations from desired dollarization.     

On the sensitivity of the volume and volatility of bilateral trade flows to exchange rate uncertainty

We present an empirical investigation of the hypotheses that exchange rate uncertainty may have an impact on both the volume and variability of trade flows by considering a broad set of industrial countries' bilateral real trade flows over the period 1980–1998. Similar to the findings of earlier theoretical and empirical research, our first set of results shows that the impact of exchange rate uncertainty on trade flows is indeterminate. Our second set of results provides new and novel findings that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows, helping us better understand macroeconomic volatility.     

DOLLARIZATION FOR ARGENTINA

In January 1999, President Carlos Menem suggested replacing the Argentine peso with the U.S. dollar. President Menem's announcement has sparked a debate throughout Latin America and Eastern Europe about what has been termed "dollarization." That debate prompted U.S. Treasury Secretary Robert Rubin to deliver a major policy speech on alternative exchange-rate regimes on April 21, 1999 and the U.S. Senate Banking Committee to hold dollarization hearings the following day featuring Fed Chairman Alan Greenspan and Deputy Secretary of the Treasury Lawrence Summers.
This article presents a case for officially dollarizing Argentina. Dollarization is not new. Unofficial dollarization is widespread in emerging market countries; in fact, as much as 70% of the stock of U.S. dollars now circulates abroad. Twenty-eight countries and dependent territories are officially dollarized. Although official dollarization would result in Argentina losing seigniorage of about 0.22 percent of GDP, the author estimates that this cost would be more than offset by a reduction in interest rates that would increase Argentina's trend rate of GDP growth by about two percent.
After debunking the most common criticisms of dollarization, the article closes by offering recommendations about the specific form of dollarization and presenting a detailed dollarization statute for Argentina. The author proposes a competitive currency regime for Argentina, one in which all foreign money would be legal tender.     

The relationship between international trade and capital flow: A network perspective

The relationship between international trade and capital flow has been extensively discussed. Using bilateral data from 2001 to 2016, we construct international trade and capital flow networks, defined as a weighted graph in which nodes are countries and edges represent trade and capital flow linkages. Centrality is employed as the main variable in this study to represent the importance of a country in the networks. To gain further insight into the network characteristics, we adopt a turning-parameter centrality to combine both the original degree and strength measurements within the weighted network. Moreover, we develop a new indicator called “partner quality centrality” to identify the quality of neighbors. Within the panel cointegration framework, we argue that a positive long-run equilibrium exists between the trade and capital flow networks as constructed. In addition, we employ a panel causality test to investigate the short-run dynamics, indicating that the international capital flow network has predictive power on the trade network from the short-run perspective but not vice versa.     

Can trade costs explain why exchange rate volatility does not feed into consumer prices?

If countries specialize in imperfectly substitutable goods, trade costs increase the share of expenditure devoted to domestic output, reducing the exposure of consumer price inflation to exchange rate changes. I present a multi-country flexible-price model where expenditure shares are inversely related to trade costs through a gravity equation. In this setting, consumer price inflation can be approximated as an expenditure-share-weighted average of the contributions to inflation from all countries. I use data from 24 OECD countries, 1970-2003, to estimate a structural gravity model. I combine the fitted expenditure shares from the estimation with actual data on exchange rates to construct predictions of inflation. The behavior of these predictions indicates that trade costs can explain both qualitatively and quantitatively the failure of exchange rate volatility to feed into inflation.     

Endogenous pricing to market and financing costs

This paper explains why relative PPP should hold more tightly in emerging markets, and why pricing to market would be observed more frequently in the OECD countries. It studies the endogenous determination of pricing to market, in a real option model with time-dependent transportation costs, where the future terms of trade are random. Allowing time-dependent transportation costs adds a dimension of investment to the pre-buying of imports, implying that financial considerations determine the frequency of pricing to market, and the deviations from relative PPP. If the expected discounted cost of last minute delivery is higher than pre-buying, one exercises the option of spot market imports if the realized terms of trade are favorable enough. Pricing to market is observed in countries characterized by low terms of trade volatility and low financing costs. In these circumstances, imports are pre-bought, and the spot market for imports is inactive. In countries where the financing costs and the terms of trade volatility are high, few imports are pre-bought, the price of imports is determined by the realized real exchange rate, and a version of relative PPP holds. With an intermediate level of terms of trade volatility and of financing costs, a mixed regime is observed. If the realized real exchange rate is weak, pricing to market would prevail, increasing consumers’ welfare by shielding them from the adverse purchasing power consequences of weak terms of trade. If the realized real exchange rate is favorable enough, more imports are purchased in the spot market, and the relative PPP would hold. Higher financing costs increase the cost of pre-buying imports, reducing thereby the frequency of pricing to market, increasing the expected relative price of imports, reducing the expected deviations from relative PPP, and reducing welfare.     

Trade, production sharing, and the international transmission of business cycles

Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good.     

The relationship between investment and large exchange rate depreciations in dollarized economies

We use a simple financial friction in an economy with high degree of liability dollarization - and currency mismatch - to show that the negative balance-sheet effect of an exchange rate depreciation may be observable only if the magnitude of the depreciation is large enough. This result justifies the difficulty to find strong empirical evidence for balance-sheet effects and suggests the convenience of including a “large depreciation” term in empirical analyses. We review some of the related empirical literature and provide some new evidence of this large depreciation effect.     

中韩工业制成品的贸易竞争关系分析

作为当今全球最重要的双边经贸关系之一,中韩贸易发展迅速,两国已互为重要的贸易伙伴。利用贸易竞争力指数、产业内贸易指数、GHM指数对中韩工业制成品的贸易竞争关系进行实证分析,结果显示：中韩双边工业制成品以产业间贸易为主,产业内贸易为辅;劳动密集型制成品、技术和资本密集型制成品以产业间贸易和低质量垂直型产业内贸易为主。两国的制成品贸易互补性强,中国相对处于产业分工的低端。为提升中国制成品的贸易竞争力,应采取加强技术自主研发、完善双边贸易合作机制、加快产业结构调整等措施。     

Leverage Constraints and the International Transmission of Shocks

Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage‐constrained investors. In our model, without leverage constraints on investment, financial integration itself has no implication for international macro comovements. When leverage constraints bind, however, the presence of these constraints in combination with diversified portfolios introduces a powerful financial transmission channel that results in a positive comovement of production, independently of the size of international trade linkages. In addition, the paper shows that with binding leverage constraints, the type of financial integration is critical for international comovement. If international financial markets allow for trade only in noncontingent bonds, but not equities, then the international comovement of shocks is negative. Thus, with leverage constraints, moving from bond trade to equity trade reverses the sign of the international transmission of shocks.     

Impact of macro-economic surprises on carry trade activity

Can official news and policy announcements affect foreign exchange speculation? A widespread speculative strategy in foreign exchange markets is carry trade. This paper explores the links between macro-economic news and foreign exchange options to identify macro-economic fundamentals most relevant to the pricing of downside risk – measured by risk reversals options contracts – to carry trade activity. Focusing primarily on the Japanese yen carry trade, we identify a significant impact of macro-economic surprises on dollar/yen risk reversals. The effect is sizeable, with news related to bilateral trade balance of particular concern. Moreover, there is a close link between risk reversals and speculative futures positions in Japanese yen. This allows us to quantify a substantial effect of macro-economic news on carry trade activity, with the cost of hedging as the transmission mechanism.     

Trade liberalization and the skill premium in developing economies

Empirical evidence shows that while the skill premium narrowed in some developing countries following trade liberalization, it widened in others, or even exhibited non-monotonic behavior. This paper studies a simple dynamic general equilibrium trade model in which differences in initial conditions across developing countries play a key role in explaining the variety of skill premium behaviors. Differences in initial conditions in terms of skilled labor and physical capital emerge in the model due to differences in trade policies. The model can generate non-monotonic behavior for the skill premium following trade liberalization.     

Stock market synchronization and monetary integration

This paper focuses on the relationship between stock market comovements and monetary integration. A panel specification is used to explain bilateral stock market return correlations between fifteen developed economies over the period 1975-2006. Time fixed effects are included to capture global shocks and we also examine the role of bilateral trade linkages and international financial integration. Monetary integration leads to stronger stock market synchronization, both through the elimination of exchange rate volatility and through the common monetary policy and the convergence of inflation expectations. Trade and financial integration also contribute to higher stock market return comovements.     

The global financial crisis: Explaining cross-country differences in the output impact

What explains differences in the crisis impact across developing countries and emerging markets? Using cross-country regressions to assess the factors driving the growth performance in 2009 (compared to pre-crisis forecasts for that year), we find that a small set of variables explain a large share of the variation in the growth impact. Countries with more leveraged domestic financial systems, stronger credit growth, and more short-term debt tended to suffer a larger effect on economic activity, although the relative importance of these factors differs across country groups. For emerging markets, this financial channel trumps the trade channel. For a broader set of developing countries, however, the trade channel seems to have mattered, with more open countries affected more strongly and those exporting food commodities being less hard hit. Exchange-rate flexibility helped in buffering the impact of the shock, particularly for emerging markets. There is also some evidence that countries with a stronger fiscal position prior to the crisis were impacted less severely. We find little evidence for the importance of other policy variables.